Wednesday, September 29, 2010

Healthstream ( HSTM - Nasdaq )

Healthstream (HSTM $5.25) is the leading provider of Internet based learning systems used by the health care industry.  Hospitals, drug companies, and medical device manufacturers sign deals covering most of their employees so they can take the courses and access a wide range of educational material.  Healthstream currently covers about 40% of the five million workers comprising the U.S. market.  Applications cover a lot of territory, including OSHA training, various certification programs, compliance, and best practices training.  Courseware usually is supplied by independent experts, although Healthstream does produce some mainstream products internally.  The company's Internet based delivery system sets it apart from most of its competition, which still rely on printed materials and CD based instruction.  Demand has been fueled by 3%-4% annual increases in the health care workforce over the past several years.  That dynamic has stalled with the recent recession.  But growth has been sustained in the 15% range by providing new products to existing customers, and by persuading hospitals to switch from older technologies.

Healthstream also provides research services for hospitals.  That line produces patient, physician, employee and community surveys, data analysis, and other measurement tools to keep hospitals abreast of the market, and how their own organizations are performing.  That segment has stumbled of late, registering growth in the 4%-6% vicinity.  Broad-based research companies have been gaining market share at Healthstream's expense.  Investments in sales and marketing are beginning to bear fruit, however, re-establishing momentum.  Growth is poised to pick up speed in upcoming periods.

A joint venture aimed at the simulation market could transform the industry over the next 5-10 years.  Healthstream and Norway based Laerdal Medical recently formed a 50%-50% partnership to develop training dummies that link to the Internet.  Currently, when a student practices resuscitation on a dummy, for example, there isn't any direct feedback or method to evaluate how well the job was done.  The simulation technology now in development will allow those measurements to be taken, making it easier for students to correct mistakes in technique.  Initial applications will be launched early in 2011.  A wide range of products are slated to follow over the next several years.  Those products promise to generate significant incremental revenue directly.  They also could pull in demand for Healthstream's traditional business if customers elect to buy from a single source.

We estimate 2010 sales will advance 13% to $65 million.  Overall growth will be retarded by the research unit, which represents about one-third of revenue.  Earnings appear on track to rise 22% on a fully taxed (40% rate) basis to $.22 a share, excluding amortization of intangibles and non cash stock option costs.  Next year, excluding the simulation partnership, revenue and income gains of 15% and 35% appear achievable, respectively.  That would put revenues at $75 million; earnings at $.30 a share.  Earnings should benefit from a decline in start-up costs associated with the simulation venture, which are expected to cost 2010 results approximately $.02 a share.  As the simulation line picks up momentum overall growth could accelerate as time goes on.  In 2-3 years sales could reach $100 million to produce earnings of $.50 a share.  A stronger showing is possible if simulation is broadly adopted.  Applying a P/E multiple of 20x suggests a target price of $10 a share, potential appreciation of 90% from the current quote.

Monday, September 27, 2010

Amerigon (ARGN - Nasdaq)

Amerigon (ARGN $10.15) is the leading manufacturer of heated and cooled automobile seats.  A number of suppliers offer heated seats.  Amerigon's technology provides a cooling option, as well, for when the weather gets hot.  The technology usually is installed in the two front seats.  Passengers can dial in whatever temperature they want.  Competitive systems made by the Germans cycle ambient air through the seats to provide cooling relief.  Amerigon provides that technology, as well, in its lower end product line.  At the high end the company employs a patented system that generates instant performance, and much colder temperatures.  During the mid 2000s, as the technology gained adoption, car companies generally offered the seats as an option on fairly expensive vehicles.  Take rates -- the percentage of buyers who bought the option -- were and remain unusually high, typically above 70%.  That's led a growing number of models to include the technology as standard equipment.  Amerigon currently supplies approximately 50 platforms.  Additional models are in the pipeline, slated for introduction in 2011 and beyond.  Between 5% and 10% of the U.S. car market now is equipped with Amerigon's seats.  That share is likely to expand as lower cost vehicles are outfitted with the systems.  Total volume could benefit, as well, if the overall car market rebounds from its currently reduced state.  Before the recent recession U.S. new auto sales averaged 16 million units a year.  Today they're in the 11-12 million range.

Expansion into new markets could amplify results.  After at least two years of testing Amerigon recently launched a line of heated and cooled beds, aimed at the upscale end of the market.  The queen size retails for $4,000.  The king goes for another $500.  Each side of the bed has separate temperature controls.  When it's getting too hot, just turn down the temperature.  If it's cold, turn it up.  Everybody who tries it, loves it.  Whether they'll pay the money is another story.  Initial demand has been strong, though.  The roll-out is beginning in Texas.  Geographic expansion is slated to keep going until the entire country is reached.  A retail partner is in place. 

A related move into medical beds could provide additional leverage.  Testing has been underway for a while on specialized chairs for chemotherapy and dialysis patients.  Their body temperatures fluctuate dramatically during treatment.  Temperature controlled chairs could ameliorate the effects better than the current method of piling on and removing blankets.  Bed-ridden patients could be another target.  Amerigon doesn't have a partner for the technology yet, but success in the consumer market might help move things along.

Earnings are advancing rapidly in 2010.  Performance declined last year as the auto market felt the recession's impact.  The combination of market share gains and an overall rebound in car demand has restored profitability to past levels.  Earnings recovered from a year earlier loss to reach $.10 a share in the June quarter.  For the entire six months income reached $.18 a share.  Revenues increased 169% in the quarter to $28.8 million.  For the entire year earnings of $.40 a share represent a realistic target.  Next year we estimate further improvement to $.50 a share.  In 2-3 years earnings could hit $1.00 a share, primarily from the auto business.  A stronger showing could develop if some of the company's new product lines make significant contributions.  Applying a P/E multiple of 20x suggests a target price of $20 a share, potential appreciation of 95% from the current quote.

Monday, September 20, 2010

Female Health (FHCO - Nasdaq)

Female Health (FHCO $5.00) is the only manufacturer of female condoms in the world.  Male condoms account for 98% of the entire market.  Demand for the female variety has accelerated over the past decade in response to a rising HIV/AIDS infection rate among women, especially in developing nations.  International relief organizations represent Female Health's primary customer base.  They distribute the condoms, usually free of charge, to at-risk populations in Asia, Africa, and South America.  In recent years agencies in the United States and Europe have entered the market, as well, serving homeless and other at-risk women.  Over the past two years Female Health re-engineered its product line to bring down unit costs by 25%-30%, while increasing the absolute amount of profit on each unit sold.  Reported sales have levelled off despite continued expansion in unit volume and overall net income.  Compliance has climbed as women have become more familiar with how the condoms work.  In the early going a lot of them went unused.  Acceptance among women has reinforced the aid groups' willingness to distribute the products.  Lower costs resulting from the redesigned line ("FC-2") are bolstering demand, too.  And U.S. Government programs have picked up with the change in administrations, now that there is less political opposition to promoting birth control in general.

Two order delays caused Q3 (June) results to fall below target.  Neither contract was renegotiated and will be fulfilled in upcoming quarters.  But the uncertainty caused the stock to decline fairly sharply, and it remains below past levels.  Deliveries on those orders are believed to have resumed in Q4 (September).  But it's unlikely they jumped above the regular trendline.  As a result, full year earnings probably finished even with those of a year earlier at $.15 a share (fully taxed).  For the fourth quarter alone income likely advanced 60%-100% to $.08-$.10 a share.

In fiscal 2011 (September) financial results are likely to get back onto the long term trendline.  Absent the recent order delays income probably would have finished at $.20-$.25 a share in the current year.  Unit volume gains of 20%-30% combined with expanding margins could propel earnings up by 40%-50% from there into the $.30-$.35 a share range in fiscal 2011.  Above average growth in the foreign aid market could be sustained well into the decade, since there are no viable alternatives to protect women from HIV/AIDS infection.  Female Health is well capitalized and is on the lookout for related products it could sell through its distribution network.  It also is negotiating with several consumer product companies to develop a commercial product.  (In Washington D.C. female condoms are distributed by a local aid group.  Extensive advertising appears on buses that drive around the city, encouraging poor women to get the products for free.  That promotional activity recently encouraged drugstore operator CVS to introduce the line for commercial sale.)

In 2-3 years earnings could reach $.50 a share.  Applying a P/E multiple of 20x to those earnings suggests a target price of $10 a share, potential appreciation of 100% from the current quote.  If the consumer market shows potential Female Health could become a takeover candidate, targeted by the large male condom manufacturers.  A higher valuation could emerge as a result.

Friday, September 17, 2010

Live Person (LPSN - Nasdaq)

Live Person (LPSN - $7.00) is the leading provider of click-to-chat software used by websites to improve communication with online visitors, and boost transaction volume.  The company originated the technology more than a decade ago.  The basic click-to-chat functionality now has become a commodity item.  But Live Person has fine tuned the technology with proprietary diagnostics and rule based systems that allow operators to jump in with a chat feature at the optimum moment, to maximize sales conversions while keeping costs under control.  ("Click-to-chat" enables website visitors to talk with a real person to help them navigate the site.  Conversations can be conducted by typing back and forth, or the two sides can pick up a phone and talk directly.)

The emphasis on analytics is boosting the software's performance.  Website operators increasingly let Live Person embed tracking devices inside their web pages.  Those results are analyzed using a variety of proprietary tools to predict the visitor's frame of mind.  That helps websites strike while the iron is hot, opening up a click-to-chat box when it appears that human intervention might seal the deal.  The software  gives workers a heads up as to what's going on, so they can hit the ground running.  Results vary by type of website (phone service and financial products are Live Person's two largest markets).  On average the company estimates that transaction volume is 20% greater than what it would be without assistance.  Live Person prices its products based on volume, so the financial risk assumed by customers is limited.  The company sells one-year subscriptions to its software, so recurring revenue is high.  The company usually has 85%-90% of each quarter's revenue lined up on the first day of the period.  Revenue visibility is high.  The renewal rate is close to 100%, as well.  In fact, many customers initially deploy the software on a small scale and buy more to cover additional websites as time goes on.

Sales advanced 28% during the six month period ended June to $51.7 million.  Q2 sales rose 29% to $26.4 million.  Excluding non cash stock option and intangible amortization expenses, six-month earnings rose 38% to $.13 a share.  They were $.06 a share in Q2 alone.  Margins narrowed in the June quarter due to a significant expansion of the sales force, plus increased hiring in R&D and administration to lay the groundwork for faster growth beyond.  Rising costs probably will keep a lid on margins during the remainder of 2010.  We estimate full year sales will reach $110 million to produce earnings of $.30 a share.

Next year sales growth could exceed the 2010 pace.  We estimate revenues will advance 35% to $150 million.  Margins promise to rebound since much of the new hiring is behind the company now.  Sales should increase more rapidly than costs.  Earnings could reach $.45 a share, up 50%.

In 2-3 years sales could reach $200-$250 million, to produce earnings of $.65-$.85 a share.    Diversification into related areas is likely, moreover, either as a result of internal product development or acquisitions.  So a stronger performance is possible.  Applying a P/E multiple of 20x to the midpoint of the range suggests a target price of $15 a share, potential appreciation of 115%  from the current quote.  Live Person itself could become an acquisition candidate.  Should a bidding war break out a higher valuation could emerge, since the company faces little direct competition and would be the only game in town.