Sunday, December 30, 2012

Reed's ( NYSE - REED ) -- New Age in Soft Drinks

Reed's (REED $5.60) is a leading producer of natural sodas for health conscious consumers.  The company has built up a loyal following for its non-alcoholic Ginger Brews, which are brewed instead of being manufactured and are based on recipes that pre-date commercial soft drinks.  Reed's also sells a line of natural root beer and natural cola through the same distribution channels.  Those outlets are predominantly specialty gourmet and natural food stores like Whole Food Markets, Trader Joe's, and Sprouts.  They additionally include mainstream supermarkets, retailers, and restaurants.  Organic growth is being maintained in the 10%-15% range as more consumers become familiar with the products.  Total sales are expanding more rapidly as a result of the recent introduction of private label products for Whole Foods and other health food oriented supermarkets.  Those are original recipes that Reed's invented to provide those stores with their own brewed offerings.  They don't compete directly with the company's own line.  That segment is gaining momentum as more products are introduced and existing customers expand the number of stores that carry them.

A new product offers huge potential.  Kombucha is a fermented tea based drink that originally was developed 100 years ago in Russia and Germany.  Despite evidence that suggested it provided a range of health benefits kombucha didn't gain popularity until the 1990s.  A privately owned company, GT Dave, created the U.S. market with a social media marketing program that emphasized those health benefits.  The primary topic was cancer prevention.  Other claims included liver detoxification, arthritis prevention, high levels of antioxidants, and probiotic benefits.  Ronald Reagan used kombucha to fight his cancer starting in 1987 and lived until 2004.  He got the tip from Alexander Solzhenitsyn, who used it to battle his stomach cancer.

Kombucha has grown into a $300 million (retail) industry in the United States.  GT Dave still controls 80%-90% of the market, perhaps more.  Other drinks manufacturers have tried to enter the lucrative business but have had difficulty making the product correctly.  Reed's appears to have solved the riddle, at least in small quantities.  In June 2012 the company announced the introduction of four flavors.  The official launch started in November.  Production currently is limited by capacity constraints.  Larger vats are slated for operation during the first half of 2013.  Reed's additionally plans to add four more flavors during the first quarter.  Distribution is ramping up at a brisk pace, although initial deliveries are relatively small and most of that will be sold at promotional pricing.  The retail channel is anxious for Reed's to be successful in lifting output and providing an alternative to DL Dave's offering.  The theory is that with two strong contenders the kombucha category will expand and become a mainstream product.

Our estimates assume Reed's is successful at expanding kombucha production.  We also think the company's traditional drinks and private label brands will continue growing at their current rate.  Start-up costs are likely to exert a drag on income, though.  And while the manufacturing expansion will raise volume we estimate the kombucha line will grow in fits and starts as the technology is fine tuned.  We estimate 2013 income (fully taxed) will advance to $.10 a share on sales of $40 million. 

Once the scaling up is complete results could skyrocket.  In 2-3 years sales could reach $75-$100 million to produce earnings of $.55-$.75 a share.  Cash flow will be stronger than that due to the availability of extensive tax loss carryforwards.  Reed's carries a fairly high debt load, so downside risk could be high in the event the kombucha line fails to develop.  Losses could be substantial if problems arise, potentially requiring dilutive financing.  If things pan out worthwhile appreciation could be realized.  Applying a P/E multiple of 20x to the midpoint of our projected earnings range suggests a target price of $15 a share (+165%).  Reed's could obtain an even higher valuation as an acquisition candidate.  A large buyer theoretically could enhance margins and expand distribution. 

These shares entail a higher than normal degree of risk  Limits are advised.  Conservative investors are advised to wait either for a lower stock price or more evidence that the kombucha launch will prove successful.

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Wednesday, December 26, 2012

Streamline Health ( Nasdaq - STRM ) -- Healthcare Information Systems

Streamline Health (STRM $5.35) is a leading provider of software products used by hospitals to enhance revenue and improve productivity.  New management took the helm in 2011 and converted most of Streamline's customer base to a software as a service ("SAAS") model where sales are recognized on a recurring monthly basis.  The new team additionally has beefed up marketing, improved product quality, and completed two high potential acquisitions.  Streamline's legacy content management line enables hospitals to integrate so-called unstructured data into standard computer records.  Those are mainly paper forms that are scanned in, allowing billing and medical experts to view the raw material when looking at patient records.  The company also provides workflow management systems that automate the process of combining different data sources into a single record.  Late in 2011 Streamline acquired a business analytics company that provided the expertise to examine those records automatically, to identify problems before they get out of hand.  In the October quarter of 2012 the company made another acquisition, this time of an automated coding provider.  The U.S. health insurance system is slated to implement a far more detailed billing scheme in 2014 ("ICD-10"), breaking down most medical procedures into more individual components than presently.  The latest deal positions Streamline to capitalize on that burgeoning opportunity.

Growth is accelerating.  The switch to a recurring revenue pricing model masked the upturn that's been building over the last two years.  Streamline formerly booked revenue up front.  Now sales are recognized as earned on a monthly basis.  Costs continue to be reported as incurred, though.  So profits were squeezed during the transition process.  Revenues and expenses now are back in balance.  Costs are relatively, fixed, moreover.  So while product development and marketing expenses still are advancing quickly, margins are starting to widen on improving volume.

Cross selling is enhancing growth further.  Streamline is integrating its three product lines on a single platform to enhance interoperability.  That's helping the company sell more products to its existing customer base.  The broader line additionally is leading to increased demand from new customers.  A large part of the potential market remains untapped.  Few hospitals have automated coding systems, and only a small percentage have business analytics software.  Even the content management side has significant potential since many hospitals are running outdated systems.

The Affordable Health Care Act could expand the total market.  As more people are covered by health insurance the volume of billing and related procedures is likely to rise.  The new coding rules, intended to save money, promise additional expansion.  Much of the health care industry is expected to come under greater regulation as a result of the new law.  Those rules could entail price controls and similar measures.  Hospital information systems appear likely to escape that pressure since better software is expected to improve overall productivity.  Streamline's margins are likely to reach their natural level in spite of the new regulations.

We estimate earnings (fully taxed) will rise 67% in fiscal 2012 (ends January 2013) to $.10 a share.  Next year a 50% improvement appears attainable.  Sales are headed towards $24 million this year (+40%).  Next year $35 million (+46%) looks achievable.  Fast gains are likely beyond as the ICD-10 coding rules take effect.  Sales of that line promise to lift Streamline's other products, as well, as customers try to reduce the number of suppliers they use.  Margins are poised to continue rising on the higher sales volume.  In 2-3 years sales could attain $50-$75 million to provide income (fully taxed) of $.30-$.50 a share.  Applying a P/E multiple of 25x to the midpoint of the range suggests a target price of $10 a share, potential appreciation of 85% from the current quote.

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Friday, December 21, 2012

Healthstream ( Nasdaq - HSTM ) -- Margins Set to Expand

Healthstream (HSTM $23.00) appears on track to produce excellent on target Q4 results.  The company is the leading provider of Internet based education, training, and certification programs for acute care hospitals in the United States.  That segment represents 77% of revenues.  Healthstream also performs market research surveys for the same clientele, to help them improve customer satisfaction and overall performance.  That business accounts for remaining 23% of sales.  The learning business is growing at a 35% rate.  The research portion has been relatively flat of late.  Healthstream has penetrated approximately 50% of the U.S. learning market, covering nearly 3 million hospital employees.  More hospitals are being added, both via direct sales and indirectly as a result of acquisitions by large hospital chains that already are Healthstream customers.  The number of courses taken by existing customers is rising, too.  And more workers per hospital are being trained these days, to comply with proliferating regulation.  Average revenue per user is up an estimated 15% in 2012.  Third quarter income was stifled by an unusually steep tax rate (48%).  Healthstream's reported tax rate is likely to stay elevated in the December period as the company works off most of its remaining tax loss carryforwards.  Still, the hit is likely to be less severe than the third quarter's.

New products are gaining momentum.  The core learning platform still is exhibiting superior growth.  But that line is bound to slow down as Healthstream fully saturates the market.  Three new areas were launched in 2012 that could pyramid on that large installed base.  The competency (assessment) and performance (performance reviews) platforms were bought by 12 hospitals in the September quarter.  Faster gains are anticipated.  Talent management (certification and workforce management) was bolstered by a pair of acquisitions this year and is being adopted even more quickly.  And a joint venture with medical mannequin producer Laerdal Medical is exhibiting steady gains.  The two companies are developing a high potential simulation technology that computerizes Laerdal's mannequins to grade how well a procedure is done automatically.  So while the core line's growth may start to moderate, the overall software business could keep expanding at a 25%-40% rate well into the decade.

Rising government regulation is fueling that growth.  Healthstream is ramping up for a major change in U.S. billing procedures scheduled for 2014.  In addition, more OSHA, HIPPA, and HCAHPS rules are forcing administrators to update their personnel's knowledge of the laws to ensure compliance.  Overall performance could be reinforced by a rebound in research surveys.  Healthstream is beefing up marketing to exploit existing customer relationships it already has in the education area.

We estimate 2012 sales will finish around $105 million to provide income of $.35 a share.  A 29% gain to $135 million appears attainable in 2013.  Higher margins and lower tax rates could yield a faster improvement in earnings.  Our estimate is $.50 a share (+43%).  Another strong performance could develop in 2014 as the new billing codes ("ICD-10") go into effect and the full sweep of the new national health insurance law kicks in.  The health care industry as a whole is certain to feel cost pressure as a result of that legislation.  Healthcare technology may be left unregulated, though, on the presumption it will improve productivity and performance.

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Thursday, December 20, 2012

Ellie Mae ( Nasdaq - ELLI ) -- Market Share Expands

Ellie Mae (ELLI $27.50) appears on track to produce excellent on target Q4 results.  We estimate earnings (fully taxed) will more than double on a 50% sales gain.  Ellie Mae acquired its largest competitor (DataTrak) in 2011.  Over the last year the company has been integrating the two software platforms to improve the technology, and to retain DataTrak's installed customer base.  Those users now are shifting to Ellie Mae's "success based pricing" model, which is easier to maintain than a traditional on-site software package.  Updates are made automatically with cloud computing.  That format also aligns the amount of money each customer pays Ellie Mae with the amount of money they earn from new mortgage generation.  Average revenue per loan to Ellie Mae is $100-$110.  Mortgage bankers generally charge $750-$1,000 per loan.  The pipeline of new users has been amplified with direct sales, as well.  Ellie Mae is in the process of doubling its sales force again, a program that should be finished by the end of March.  Existing customers also are adding more seats.  That backlog of active users virtually ensures that revenue growth will be maintained at above average rates even if the U.S. economy stumbles next year.

R&D spending will finish 2012 in the 18%-20% range.  A major investment recently was completed to upgrade the company's network architecture.  That's a private system that lenders, borrowers, and vendors (credit bureaus, etc.) use to share information.  Ellie Mae also spent heavily on the DataTrak integration.  And several new products are under development.  Those are designed to raise Ellie Mae's revenue per loan or enhance productivity.  E-signing and mobile phone apps are likely to be introduced in 2013.  Development of more revenue boosting products is likely to keep R&D spending at an elevated pace next year.  But as a percentage of sales a modest reduction is likely.  One area of savings will be the network.  Ellie Mae is running both its new and old systems currently.  The legacy network will be decommissioned shortly.

Margins are beginning to benefit from the "total quality loan" initiative.  Ellie Mae licenses its technology to Wells Fargo and Citibank, enabling those mega-banks to structure incoming data in a consistent manner.  Both companies have their own mortgage processing computers, and are unlikely candidates to employ Ellie Mae's complete software package.  But just making sure the incoming data arrives correctly is generating about $25 a loan for Ellie Mae.  Start-up costs have consumed most of that to date.  As operations become routine, though, significant incremental income could emerge.  Additional large banks are believed to be investigating the technology.

Federal Government mortgage relief could bolster industry volume.  Tight lending rules have thwarted millions of homeowners from taking advantage of today's low interest rates.  Many prospective borrowers still hold less than 20% equity in their homes or fail to qualify for some other reason.  Looking just at the pool of loans Ellie Mae processes, the average credit score of the people who get loans is 750.  The average for those who don't is 700.  A fairly inexpensive loan guarantee program could help the latter group sharply reduce their borrowing costs. 

The extra paperwork created by the Dodd-Frank financial legislation is boosting demand for Ellie Mae's automation software.  Updates are delivered immediately to the entire user base because the software is cloud computing based.  Users of on-site software have to update each computer with the new and ever changing regulations.  The drumbeat of regulatory changes has begun to draw larger banks to Ellie Mae's technology.  In the past the company made its greatest inroads among smaller banks with limited programming staffs.  The Dodd-Frank rules are threatening to overwhelm much bigger operations, too.

Operating margins could improve in 2013.  Sales and marketing, and product development, will be maintained at high levels.  But revenues are generated with few direct costs.  So every additional sale is highly profitable.  We estimate sales will advance 35% next year to $135 million to support earnings of $.90 a share (+29%).  Average shares outstanding likely will increase 10% due to a stock offering earlier in 2012.  Direct competition has not emerged.  Two companies are believed to be developing mortgage automation products of their own.  By the time those are introduced Ellie Mae could have a majority share of the potential market locked up.  Users are unlikely to switch due to the technology risk, retraining cost, and lost time associated with moving to a different system.  So pricing is likely to remain firm over the long haul.  Margins could rise further in the years ahead as sales volume keeps expanding.

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Wednesday, December 19, 2012

Ansys ( Nasdaq - ANSS ) -- Acquisitions Raise Outlook

Ansys (ANSS $68.00) appears on track to produce good Q4 results.  Performance likely has been impacted by lenghtening sales cycles.  But underlining demand for the company's engineering simulation software products remains sturdy.  The company released its latest version (14.5) in December.  Download activity -- most customers are entitled to product upgrades as part of their original licenses -- exceeded previous levels by a wide margin.  The new version included a wide range of time saving automation features.  The Apache acquisition (2011) has provided a major lift to overall results.  A recent deal (Esterel) promises to deliver material benefits beginning next year.  Ansys has an established record of buying top notch technologies, adding related features, improving the user interface, and expanding the potential market by adding the new line to its worldwide distribution network. 

Profit margins are exceptional, in the 50% pretax area.  Approximately 70% of sales are recurring in nature.  So cash flow is abundant, enabling the company to pay what it needs to in order to make key acquisitions.  Organic growth has slowed due to the worldwide recession.  It now is 5%-10% compared to a more customary 15%.  But acquisitions are reinforcing the uptrend, while making Ansys increasingly protected from competition.  Most end markets remain in early stages of development.  New inventions are likely as time goes by, buttressing the long term outlook.  Emerging markets offer great opportunity, as well.  Above average growth could be sustained well into the decade.

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Monday, December 17, 2012

Performant Financial ( Nasdaq - PFMT ) -- Government Dims Outlook

Performant Financial (PFMT $9.00) appears on track to produce good Q4 results.  Results have been slowed in recent months by technology upgrades by the federal government, which has slowed the amount of business Performant has been able to pursue.  More worrisome is a modification in the student loan program.  The poor economy has made it increasingly difficult for graduates to repay their loans.  Ordinarily that would have expanded Performant's potential market.  The company is the leading provider of loan modification and collection services.  The government has implemented new schedules that tie repayments to a percentage of income.  At this stage Performant is continuing to handle the negotiations.  But if the format gains widespread adoption the whole repayment scheme could become more automated and routine, diminishing the value of the company's involvement.  The government eventually could bring the entire effort in-house, moreover, similar to the way it took control of the lending process. 

Performant's Medicare operation (25% of revenue) still offers above average growth potential.  The new health care law could expand claim volume.  New coding systems might make the billing process more complex, as well, boosting the need for oversight.  Performant carries a sizable debt load, however.  And if the student loan profitability declines the pressure on finances could rise materially.  The shares may rebound over the next few quarters as the government completes its technology revamp and volume improves.  But the long term outlook has become less certain due to the Obama Administration's more relaxed student repayment scheme.  Our advice is to reinvest in a more dynamic Special Situation.

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Sunday, December 16, 2012

Napco Security Technologies ( Nasdaq - NSSC ) -- Digital Rollout Continues

Napco Security Technologies (NSSC $3.35) appears on track to produce solid Q2 (December) results.  The company is a leading provider of security systems for commercial (80%) and residential (20%) customers.  Based in the northeast, performance was impacted recently by Hurricane Sandy.  Product updates and greater marketing efforts have bolstered Napco's core performance.  Improving real estate activity is adding further impetus.  The introduction of a next generation Internet based technology promises to amplify results over the next several years.  Those products enable customers to control their systems remotely and perform a wider range of features.  The new line includes a recurring revenue component which promises to bolster margins.  The critical software included in the systems will need to be upgraded over time.  The recurring revenue ensures the technology improvements are delivered.  Adoption of the new wireless and Internet products is growing rapidly, albeit from a small base.  Broader acceptance is possible if the cable companies begin to market security products more aggressively.  Most have added them to their product lines but so far the selling effort has been muted.

Margins could expand materially down the line.  The recurring revenue should improve them directly.  Napco also is operating below capacity at present.  So higher sales will spread fixed costs over a broader base.  The tax rate is likely to remain at 20% due to offshore manufacturing.  In 2-3 years sales could achieve $100 million to produce income of $.75 a share.

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Saturday, December 15, 2012

Argan ( NYSE - AGX ) -- Full of Moxie

Argan (AGX $18.75) reported better than expected Q3 (October) results.  We also revised our Q2 (July) income figure upwards by $.08 a share to exclude a non-recurring legal settlement.  Construction work proceeded on two projects.  The larger is a natural gas fired electricity plant in California.  The other is a so-called biofuel facility in Texas that burns scrap wood.  The latter is financed in part with government subsidies.  Backlog stood at $236 million at the end of the period.  New orders were $20 million, reflecting additions to the current projects.  Revenues advanced 71% to $74.5 million.  Income improved 150% to $.45 a share.

Progress was achieved on the Moxie project.  Argan is in line to engineer and build two natural gas fired electricity plants in the Marcellus Shale in Pennsylvania.  The operating company, Moxie Energy, plans to fuel the systems with low cost natural gas from nearby fracking sites, eliminating the need to deliver it by pipeline.  The electricity produced will be sold into the northeast market.  Argan's potential revenue is in the $800-$900 million range.  Final regulatory approvals and financing agreements are expected to be completed in the current quarter.  Our fiscal 2014 (January) estimates assume only a modest contribution from the Moxie project.  Work on the company's existing two projects will begin to wind down next year but the income generated should be sufficient to keep performance at a high level. 

The Moxie build-out could support a much higher baseline of activity.  That deal alone promises to lift revenues above current levels.  Power generation in the U.S. remains below 2007 standards.  But electricity consumption is rising, and the pace could accelerate if the overall economy improves.  New facilities are likely use natural gas, solar, and wind power.  Those are all Argan specialties.  Tighter regulations on coal plants promise to reinforce the trend. 

Argan is well positioned to succeed in what remains a competitive industry.  The company's overhead is lower than larger participants.  It also moves faster and fixes cost problems more quickly, minimizing over-run risk.  Argan has added a lot of management and engineering talent over the past few years, though, allowing it handle complex jobs that smaller competitors have a hard time coping with.  Assuming a modest inflow of new contracts in addition to the Moxie project, revenues could reach $500 million in 2-3 years to provide earnings of $3.25 a share.

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Friday, December 14, 2012

Acacia Research ( Nasdaq - ACTG ) -- Ready for Blastoff

Acacia Research (ACTG $24.00) is prepared to drive its financial results substantially higher over the next two years.  The company has expanded its patent portfolio to include 250 families.  Five of those are especially high potential collections.  Two are owned outright by Acacia.  The remainder of the company's intellectual property holdings are shared with the original inventors.  In most cases Acacia divides any proceeds received 50-50 with the original owners, less what they pay to outside patent lawyers to pursue the cases.  The three major families where Acacia has partners were designed on a more customized basis, where the company paid the holders some cash up front and retained a higher interest in the future proceeds.  It ordinarily takes 12-18 months for Acacia to prepare a new group of patents for commercialization.  That preparation phase is nearing an end for three of the company's five big portfolios.  The other two have been in something of a hiatus, too, for different reasons.  In 2013 a flood of settlement activity could develop. propelling earnings dramatically above current levels.

Acacia is negotiating 5-6 large "structured agreements."  Those are bundled transactions where infringing companies license all of Acacia's intellectual property for a three year period.  Past deals with Microsoft, Oracle, Samsung, and Cisco Systems have averaged $40 million.  Acacia's portfolio is far more extensive today than it was when those deals were signed, although it's much more diversified, too.  The company's initial focus was wireless and computer technology.  Recent expansions include medical devices, automotive, and industrial systems.  Future structured transactions probably will include only a subset of Acacia's total arsenal, relevant to the target's area of interest. 

Acacia is heading to court in April to sue Apple Computer.  The company owns the Palm patents, which created the foundation for the smart phone industry.  Apple recently won a $1.0 billion judgement against Samsung over the shape of the phone.  Acacia could win that much if not more if it's victorious in its claims concerning how the phones actually work.

In 2-3 years earnings could reach $2.50-$3.00 a share.  Faster gains are possible.  Acacia's existing patents still have plenty of shelf life.  And the company probably will reinvest some of its future cash flow in additional patent families.  Above average growth could be sustained well into the decade.

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Wednesday, December 12, 2012

Cyanotech ( Nasdaq - CYAN ) -- Restores Growth

Cyanotech (CYAN $5.00) appears on track to produce excellent on target Q3 (December) results.  The company experienced production problems with its Spirulina line during the past two quarters.  That issue has been resolved, enabling output to rebound to previous levels.  Astaxanthin volume wasn't impacted.  That line probably will diminish as it usually does during the winter, due to reduced sunlight.  But on a year to year basis production remains at a high level.  Cyanotech added several marketing executives earlier in the year to build the retail and Internet channels.  Those efforts are beginning to bear fruit.  Greater traction is likely in subsequent periods.  Average prices are rising as more output is shifted from bulk to retail customers.  Orders continue to outpace capacity by a sizable margin.  Income is poised to show a solid positive comparison in the December quarter.  Cyanotech currently outsources its "extraction" process, which purifies the output for human consumption.  Turnaround time tends to be a month.  Since the production fix occurred midway during the quarter some of the increased volume might not get shipped by December 31.  If a favorable turnaround is achieved a stronger performance is possible.

Any unfilled orders will be delivered in Q4 (March).  That quarter usually is Cyanotech's low point, due to the short days (less sunlight).  Still, output per acre has been improving with the exception of the recent Spirulina setback.  So another favorable comparison is likely in that period, as well.  Our full year earnings estimate is unchanged at $.40 a share.

Higher average selling prices should expand margins in fiscal 2014 (March).  Marketing costs probably will continue to rise.  But selling prices to retail chains tend to be 2x-3x higher than in the bulk channel.  Cyanotech is creating multiple products to address that market, moreover, creating the potential for greater revenues per store.  Demand continues to accelerate for Astaxanthin and Spirulina, fueled by athletes who use the products for energy and recovery, and health conscious consumers seeking immunity from disease, better eyesight, and sunburn protection, among other things.  We estimate revenues will advance 29% next year to $36 million, providing earnings of $.65 a share (+62%).

A key lawsuit seems to be going Cyanotech's way.  One of its bulk customers sued the company earlier in the year over patent infringement.  In reply Cyanotech completed its existing supply contract, but declined to renew it.  That output was diverted to other customers, which are willing to pay higher rates.  The litigant failed to show it even had a patent during the trial's discovery stage.  That company has been extracting settlements from other industry participants for several years with its non-existent intellectual property.  Cyanotech was the first to fight back.  A settlement remains possible but at this point it looks like the whole thing might be dropped for lack of evidence.

Physical expansion is in the pipeline.  Space is available in the office park in Hawaii where Cyanotech operates.  Additional growing capacity probably will be added on a sequential basis over the next several years. 

In 2-3 years sales could attain $50 million to support income of $1.00 a share.  Applying a P/E multiple of 15x suggests a target price of $15 a share, potential appreciation of 200% from the current quote.  Product line extensions, broader retail distribution, and production expansion could yield a substantially stronger showing.

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Tuesday, December 11, 2012

Simulations Plus ( Nasdaq - SLP ) -- Customer Mergers Slow Growth

Simulations Plus (SLP $4.25) announced preliminary Q1 (Nov.) revenue growth of 2% to $2.29 million.  Approximately $450,000 of normally recurring revenue wasn't re-signed because of mergers and consolidations.  In the past the scientists displaced in those types of reorganizations typically re-acquired their licenses once they started working someplace else.  New business offset the drop-off.  If the merger-related decline had not occurred, revenue growth would have been 22%.

Growth promises to be reinforced by consulting and professional service revenue.  Initial contributions from the fledgling toxicology line could deliver further impetus.  Demand from existing and new customers is rising in response to the company's in-house malaria project, moreover.  Simulations Plus used its technology to identify promising therapeutic molecules, using software engineers instead of medical researchers.  All seven candidates showed activity, with two warranting further development.  Those results have persuaded a growing segment of the potential market to take a closer look at the technology.  A second project, aimed at a different disease, will be started in upcoming periods to show the malaria effort wasn't a fluke.

The threat of higher dividend tax rates has exerted pressure on the stock.  Simulations Plus pays a $.05 a share quarterly dividend  .If interest rates remain low that payout should remain attractive to at least a segment of the investment universe (retirement plans).  Our full year estimates are unchanged.

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Monday, December 10, 2012

Carbo Ceramics ( NYSE - CRR ) -- Market Share Gains Continue

Carbo Ceramics (CRR $78.00) appears on track to produce excellent on target Q4 results.  The fourth quarter usually is seasonally slow due to the holidays.  So sequential performance may decline.  But drilling activity in the U.S. remains robust, particularly in oil regions.  And Chinese competition is continuing to abate.  Carbo has increased marketing efforts to demonstrate its technology's superiority.  Well output typically improves by 20% with the company's proppants, compared to lower priced sand or ceramic imports.  The company is continuing to focus on improving its products strength while reducing weight to provide increased price-performance characteristics.  Carbo also is developing a next generation line that could amplify its competitive advantage.  Introduction is likely inn 2013.  Our estimates are unchanged.  Faster gains are possible if natural gas drilling rebounds either due to improved economic activity or greater exports.

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