Thursday, June 28, 2012

Cyanotech ( Nasdaq - CYAN ) -- Victory at Sea

Cyanotech (CYAN $6.65) reported Q4 (March) results that were somewhat below our expectation.  Earnings rose 67% to $.05 a share.  Sales climbed 15% to $5.99 million.  Income was reduced by $.14 a share due to abnormally high production costs associated with the Spirulina line.  That segment represented 35% of total sales for the entire year.  Cyanotech recorded that entire expense in the fourth quarter.  New equipment and procedures have been implemented to return costs to normal.  That effort is expected to be completed over the next few quarters.  We estimate the impact will continue at approximately $.01 a share per quarter.  The high potential astaxanthin line performed as predicted.  In fact, production exceeded the company's forecast for the entire year.  The Q4 sales comparison was skewed a bit by $700,000 of obsolete inventory sales in the year ago period.

Marketing efforts are accelerating.  Most of the company's astaxanthin sales growth has been generated by adding new customers, primarily small natural product stores.  Social media and other business development programs now are being geared up to boost same store volume at those outlets.  Larger chains are being targeted, as well.  In the year just ended bulk sales represented 65% of total revenue; retail, 35%.  The shift to greater retail business promises to lift sales and margins in the current fiscal year.

Volume also should benefit from capacity expansion.  Cyanotech boosted its growing area by 33% last year.  That additional capacity now is ramping up.  Consumer demand for astaxanthin continues to exceed demand, so Cyanotech should have little trouble finding outlets for its higher level of production.

We are raising our fiscal 2013 (March) earnings estimate by a nickel to $.60 a share (fully taxed).  Our sales estimate is unchanged at $30 million (+22%).  Above average growth could be sustained well into the future.  In 2-3 years earnings could attain $1.00 a share.  Applying a P/E multiple of 15x suggests a target price of $15 a share, potential appreciation of 125%.

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