Thursday, December 22, 2011

Amerigon ( Nasdaq - ARGN ) -- Legal Entanglement Delays Merger

Amerigon (ARGN $14.50) suffered an adverse legal ruling concerning its W.E.T. acquisition.  The target company is based in Germany.  Amerigon purchased 76% of the stock in direct transactions earlier in 2011.  The remaining 24% is subject to highly regimented German securities laws.  Amerigon had hoped to follow a path that would have allowed it to force the remaining shareholders to sell, or at least give Amerigon operational control of the company.  A court ruling blocked that avenue and steered the company to a slower resolution.  Amerigon is likely to complete the deal in 2012.  But it won't be able to obtain operational control until the transaction is entirely finalized, probably late in the year.  That will prevent Amerigon from quickly integrating the two operations, which promised costs savings, R&D innovations, and cross selling opportunities.  We have reduced our 2012 earnings estimate by a dime, accordingly.  Investors are advised to wait for greater clarity before re-establishing positions.

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Friday, December 16, 2011

Boingo Wireless ( Nasdaq - WIFI ) -- In a Hot Spot

Boingo Wireless (WIFI $8.75) is a leading provider of Wi-Fi software and services that connect mobile devices to the Internet.  The company installs and manages complete "venue" systems, like in airport terminals, which are available to the public on a per diem basis.  Boingo also sells monthly subscriptions which provide access to a worldwide network of more than 400,000 hotspots.  Revenues additionally include advertising income, usually connected with venue systems.  Boingo currently operates more than 80 venue projects.  Demand for Wi-Fi systems is rising due to surging data traffic on mobile phone networks.  Wi-Fi provides a less expensive alternative in many cases.  It also simply provides access during peak periods.  Cell networks often get bogged down, particularly at concerts, sports events, transportation hubs, and shopping malls.

Venue deals are characterized by revenue sharing contracts.  Some sites provide free access as a marketing tool.  But Boingo still earns transaction fees and other payments on those deals.  Traditionally users have paid modest fees to get on a Wi-Fi network, airport terminals being the most prevalent example.  The popularity of mobile devices is causing demand to accelerate.  And Boingo has shifted its focus, accordingly.  Targets include stadiums, arenas, malls, shopping centers, and quick service restaurant chains.  International locations, which currently account for 15% of revenue, provide further opportunity.  Revenues already are climbing at a brisk pace and promise to keep rising as more locations are added and existing sites handle greater amounts of traffic.

Margins are likely to widen as recurring revenue builds up.  Revenues are poised to advance only 16% in 2011 despite a sharp improvement in venue related (wholesale) business.  Individual subscriptions have declined with the advent of less expensive cellular contracts.  But the churn rate on that segment has diminished, preventing a significant fall-off in revenue.  Still, the venue segment will drive performance over the next several years.  Boingo typically pays to install those systems and then earns a share of the revenue stream over multi-year contracts.  Those deals typically are renewed on favorable terms.  As the installed base rises profitability is likely to expand.  We estimate 2012 revenues will improve 24% to $115 million to provide a 40% increase in non-GAAP earnings to $.35 a share.

In 2-3 years revenues could reach $175 million.  Earnings could attain $.60 a share.  Boingo pays an unusually steep tax rate.  If that levy is reduced to 35% income could benefit by an additional $.05 a share.  Applying a P/E multiple of 25x suggests a target price of $15 a share, potential appreciation of 70% from the current quote.

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Thursday, December 15, 2011

Cyanotech ( Nasdaq - CYAN ) -- Catches a Wave

Cyanotech (CYAN $8.25) is a leading producer of nutriceutical products used by high performance athletes and other health conscious consumers.  The company's products are derived from algae, which is harvested from a network of growing ponds in a Hawaiian industrial park.  Cyanotech's leading product historically was Spirulina Pacifica, a dietary supplement that provides energy, cardiovascular benefits, and antioxidents that delay the aging process.  That line is a favorite of distance runners and other high endurance athletes to raise performance and enhance recovery.  A second algae based line, BioAstin, was developed more than a decade ago.  That product offers a wider range of benefits including skin, eye, and joint support and reduced inflamation, along with an even greater level of antioxidents.  Demand never gained momentum, however, due to intense competition for shelf space and the lack of a major marketing effort. 

All that changed early in 2011.  BioAstin was featured on the popular Doctor Oz television show.  The segment was repeated two additional times at 2-3 month intervals.  The claim was made that BioAstin was the #2 supplement in the world, right after Vitamin D.  Demand immediately rocketed after the television broadcasts.  And volume has continued to build.  Repeat business has been strong and new consumers continue to try the product.

Most astaxanthin (BioAstin's central ingredient) sales historically were made to bulk buyers.  Part of the output was used by salmon farmers to color the meat like wild fish.  The farmed version comes out white without the additive.  The rest was sold to bigger supplement companies that included astaxanthin in a variety of consumer offerings.  Cyanotech sold some BioAstin directly to retailers in Hawaii, including Costco.  It also landed a few accounts on the mainland, and operated a small direct sales operation.  Prior to the Doctor Oz breakthrough, though, most revenue was generated by the Spirulina Pacifica line.  Overall growth was moderate.  Profitability was okay.  But there wasn't any real excitement in the picture.

Cyanotech kept a low profile during the initial blast-off.  New management had just taken the helm.  And the company wanted to make sure the increase wouldn't be short-lived.  Demand has continued to build, alleviating those concerns.  Measures now are being implemented to capitalize on the burgeoning opportunity.  Physical capacity is being expanded by 33%.  The poor economy has enabled Cyanotech to obtain space inside its existing office park, simplifying logistics.  Productivity at existing ponds is improving, too.  And less output is being directed to bulk purchasers.  New retail distribution is being arranged instead, at higher selling prices.  An advanced processing unit is slated to go on line over the next 18 months, moreover, boosting turnaround time and margins.  A new name for BioAstin is being evaluated, as well, to lift consumer appeal.

Sales advanced 54% in the June period to $5.95 million.  Fully taxed earnings climbed 40% (excluding stock option expense) to $.07 a share. In Q2 (September) sales jumped another 56% to $5.99 million.  Earnings improved 86% to $.13 a share.  Revenues depend on the amount of algae produced.  And that volume typically declines in the winter because there is less sunlight.  In the year ago December quarter Cyanotech had inventory in reserve to keep revenues intact.  This year the shelves are bare due to the surge in demand.  So a less vibrant comparison may be in the cards.  Cyanotech also is beefing up marketing and other business development activities.  So margins also might get compressed by those additional costs.  The company has a lot of scientific talent on hand, though, so output might turn out to be better than historical metrics would suggest.  Astaxanthin prices are rising, moreover, a trend that's likely to continue and reinforce performance in future periods.

We estimate fiscal 2012 (March) earnings will finish around $.30 a share (fully taxed).  Next year $.45 a share represents a realistic target.  A variety of risks will be encountered over the long haul.  BASF and a slew of Chinese chemical producers are developing synthetic versions of astaxanthin.  The initial target is the fish farming industry.  But over time the lower cost (lower quality) competition could affect Cyanotech's consumer operations.  The industry itself is incredibly competitive and flighty.  Dietary supplements come and go all the time.  It's extremely hard to establish a recurring business, and the marketing costs to sustain demand are steep.  Spending increases that coincide with temporary demand decreases are capable of generating dramatic earnings reversals.  Weather vagaries and other logistical issues present a danger, as well.  On top of that new chairman could take over the two Congressional committees that oversee diet supplements.  Those individuals are considered less supportive of the industry, so regulatory hurdles could become more pronounced.

If Cyanotech avoids those pitfalls sales could reach $50 million in 2-3 years.  Earnings could attain $.75 a share.  Applying a P/E multiple of 20x suggests a target price of $15 a share, potential appreciation of 80% from the current quote.

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Thursday, December 8, 2011

Stratasys ( Nasdaq - SSYS ) -- Turnaround on Track

Stratasys (SSYS $29.00) is likely to produce solid on target Q4 results.  The company is the leading producer of direct digital manufacturing "printers" that take CAD-CAM designs straight from a computer and immediately make the part, without any set-up.  The technology enables customers to manufacture low volume products for the same cost as a mass produced item.  Stratasys got its start by serving the engineering market.  Development teams used the systems to make prototypes directly from computer generated designs, eliminating the need to build models from clay or in the shop.  Over the past few years the company has launched larger units aimed at manufacturing customers.  Those higher cost systems have begun to catch on and have become Stratasys's primary growth driver.  The company also sells consumables (a variety of plastics used as raw material).  Demand for those products tends to be greater in manufacturing applications than in engineering.  So that segment is accelerating, as well. 

The legacy engineering business currently is stalled due to economic factors and a dormant partnership with Hewlett-Packard.  The company originally had high hopes for its H-P relationship (which was aimed at the engineering segment) but the larger company dragged its feet, holding back performance.  Last summer Stratasys essentially threw in the towel and reinstituted its own marketing efforts in lieu of H-P.  That program is gaining momentum but probably won't make a meaningful contribution until next year.  Even so, growth in the manufacturing segment promises to keep overall performance on an upward slope in Q4.  Faster gains are possible in 2012 as the engineering unit returns to life.

Direct digital manufacturing has the potential to become a disruptive technology.  The industry remains in an early stage of development.  But profitability already is well established.  And new avenues for growth are opening up.  Stratasys has several new products in the pipeline.  Enhancements are likely to include larger capacities, faster throughput, lower costs, and a wider range of material inputs.  Streamlined user interfaces promise to broaden the market further.  A series of inflection points could be reached through the rest of the decade, enabling Stratasys to dislodge entrenched manufacturing techniques in a wide range of applications. 

We estimate 2011 income will rise 22% to $1.00 a share.  Next year profitability might be impacted by the shift away from H-P to the company's own marketing efforts.  Economic factors are likely to weigh on performance, as well.  Nonetheless a 15%-20% advance to $1.15-$1.20 a share represents a realistic target.  Growth promises to accelerate beyond as the economy recovers and the internal marketing program builds momentum.  In 2-3 years earnings could approach $2.00 a share. 

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Thursday, December 1, 2011

Simulations Plus ( Nasdaq - SLP ) -- Sheds Non-Core Business

Simulations Plus (SLP $3.00) reported unexceptional Q4 (August) results.  Performance was impacted by the non core Words Plus text to speech line.  The company sold off that operation on November 30th, the final day of Q1 2012.  Combined non-GAAP earnings (excluding stock option expense) slipped 50% in the August period to $.01 a share.  Sales were down, as well, by 4% to $2.12 million.  The high potential pharmaceutical simulation software line posted a 7% revenue gain in the August quarter.  The year earlier period included a non-recurring project fee ($350,000) which skewed the comparison.  Excluding that software revenues advanced 40%. 

Margins promise to expand in the upcoming year.  Simulations Plus is the leading provider of simulation tools used by drug developers to identify promising molecules.  The technology speeds up time to market by narrowing down the search so laboratory testing and clinical trials can focus on the highest potential candidates.  The discontinued Words Plus operation produced about 25% of total sales but was lucky to break even.  Without that drag non-GAAP profitability is poised to soar into the 45%-50% area (pretax).

Organic growth of 15% or more is likely to be maintained.  Simulations Plus sells its software on an annual subscription basis.  The renewal rate was 93% in fiscal 2011 (August) and historically has been above 90%.  New customers accounted for 22% of software sales.  That trend is likely to continue as additional divisions of large drug companies adopt the technology, existing users purchase additional modules, and smaller biotech and academic users come on board. 

Only a small portion of the potential market has been penetrated to date.  Organic growth could accelerate as the technology's productivity benefits become more widely known.  Faster computers, greater reliance on parallel processing, and easier to use interfaces could reinforce growth.  Near term hurdles are the poor economy, which is having an effect on drug company profits; and the growth in regulatory uncertainty.

We estimate non-GAAP income will advance 22% in fiscal 2012 (August) to $.22 a share.  Sales could advance 15% to $10 million, excluding the discontinued Words Plus operation.  Cash flow continues to build.  In the year just ended Simulations spent $2.0 million to repurchase stock.  The company also is investigating potential acquisitions.  Several targets are believed to be in the company's sights.  Past negotiations have stalled due to valuation concerns.  The current environment might bring prices more into line.  Simulations Plus has a great platform that it could leverage with additional niche products.  Growth could accelerate with an effective transaction or two.

In 2-3 years non-GAAP earnings could reach $.30 a share.  Applying a P/E multiple of 20x suggests a target price of $6.00 a share, potential appreciation of 100% from the current quote.  Faster gains are possible if the technology gains wider adoption.  Acquisitions could yield further leverage. 

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