Carbo Ceramics ( NYSE - CRR ) -- Market Share Expands Despite Intense Competition

Carbo Ceramics (CRR $72.00) reported lower than expected Q1 results.  Unit volume improved 7% even though the number of drilling rigs in operation declined by 12%.  Margins were compressed, however, as a result of renewed international competition.  That arose both from China and Brazil.  Prices fell 14% due to the pressure from lower quality competition.  Earnings finished at $.81 a share in the March quarter (excluding stock compensation expense), off 40% year to year.  Besides the need to discount prices profitability was impacted by high distribution costs in North Dakota and other oil producing regions.  Slow drilling activity is likely to keep a lid on financial performance in the June quarter, as well.  Natural gas activity is at a 15 year low, due to ongoing oversupply conditions.  Oil drilling remains fundamentally robust but is likely to moderate temporarily due to seasonal factors.  The natural gas segment is poised to start recovering later in 2013, bolstered by improved supply-demand conditions and rising market prices.  Fracked wells tend to deplete faster than conventional reserves, moreover.  The paucity of drilling over the last two years may cause existing output to diminish, requiring new efforts just to maintain supply.

Technology improvements are in the pipeline.  Carbo's existing line already yields better flow rates than competing products.  It's next generation is expected to enhance output further, and facilitate drilling in more difficult formations.  Pricing will remain an issue over the long haul due to the competitive nature of the energy industry.  But Carbo should be positioned effectively to blunt lower cost competitors by delivering superior performance, enhancing its customers' return on investment.  The fracking industry currently exists mainly in North America.  Expansion to other parts of the world is likely.  Weak economic conditions have delayed the energy industry's rebound, which in turn has affected Carbo's performance.  The long term outlook remains bright, though.

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Health Insurance Innovations ( Nasdaq - HIIQ ) -- The Affordable Alternative

Health Insurance Innovations (HIIQ $14.00) is a leading provider of short term medical insurance plans for individuals.  The policies are underwritten by several major insurance companies that Health Insurance Innovations has longstanding relationships with.  The company doesn't possess any underwriting risk.  Those plans are offered through the company's website to individuals who don't have serious pre-existing conditions, and who need coverage for 6-12 months.  Unlike traditional plans, those offered by Health Insurance Innovations are not automatically renewable.  If a customer comes down with a serious disease or condition the policies will cover it through the end of the policy's term.  But the policy won't be renewed.  The fact that most of Health Insurance Innovations' customers are healthy keeps prices low, however.  Individuals typically pay 50% or less of what a traditional major medical policy costs.  To date most customers are healthy individuals who need short term coverage against catastrophe.  Most are small business owners and their employees, recent graduates, divorcees, early retirees, military discharges, unemployed, seasonal workers, and temporary employees.  Health Insurance Innovations relies on a network of brokers and sales agents to distribute its products.  Most policies are issued the same day the application is made.  Payments are made by credit card or similar method, eliminating bad debt risk.  The company offers a variety of related products, moreover, such as pharmacy cards, dental, vision, hospitalization, and cancer/critical disease plans.  Those cost less but enhance profitability by sharing overhead costs.

The new U.S. national health insurance law promises to accelerate growth.  The legislation takes effect in 2014.  It requires individuals to carry health insurance or face tax penalties.  It also forces employers with 50 or more workers to provide insurance or face tax penalties.  It prohibits traditional major medical insurance companies from denying coverage for pre-existing conditions.  And it requires them to spend at least 80% of premiums on clinical services.  Industry analysts predict the individual health insurance market will expand from 14 million Americans currently to 100 million or more as a result.  The short term policies offered by Health Insurance Innovations are exempt from the new regulations.  The company already is boosting distribution by offering higher commissions, better web services, and increasingly customized plan designs.  Many prospective customers will be able to purchase one of the company's plans for little more than the fine they'll pay under the new scheme for not having any coverage.  Additionally, if customers are afflicted with serious medical issues they will be able to switch to a major medical plan later, because those offerings will be required to accept all pre-existing conditions.

Growth already was robust under the existing rules.  Sales advanced 40% in 2012 to $41.9 million.  Earnings improved 39% to $.25 a share.  Health Insurance Innovations sold 5.3 million shares at $14.00 apiece in February, raising an additional $69 million in fresh capital to finance growth.  A recent acquisition is likely to enhance margins.  (That transaction will result in a non-recurring write-off, reducing GAAP earnings in Q1.  Our estimates exclude that impact.)  Additional funds are being advanced to some distribution partners the company has proven relationships with, to help them prepare for the enlarged opportunity created by ObamaCare.  Health Insurance Innovations' web based technology promises to yield rising margins as volume expands, as well.

We estimate sales will rise 43% in 2013 to $60 million to provide earnings of $.40 a share (+60%).  Next year $100 million (+67%) represents a realistic target.  Earnings could climb 87% to $.75 a share.  A stronger performance is possible if awareness of the short term plans proliferates.  In 2-3 years sales could attain $150-$200 million to support income of $1.50-$2.50 a share.  Applying a P/E multiple of 20x to the midpoint of the range suggests a target price of $40 a share, potential appreciation of +185% from the current quote.  Limits are advised.

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Acacia Research ( Nasdaq - ACTG ) -- Apple Settlement Disappoints

Acacia Research (ACTG $29.00) reported lower than expected Q1 results.  The company settled its patent infringement case against Apple Computer in the period.  That involved fundamental smart phone technology originally invented for the Palm Pilot.  The company received $50 million, a small increase from the payments received from Samsung and Microsoft.  Acacia spent most of those proceeds on legal preparation costs and royalty payments to the original inventors.  Only a modest profit was realized.  That might prove to be a positive outcome in the long run if Apple becomes more receptive to working with Acacia in the future.  The company already is working with several major corporations to establish something of a patent exchange, with Acacia serving as the nucleus.

Future quarters promise to demonstrate higher profit margins.  Acacia spent heavily to prepare its case against Apple.  Legal expenses are likely to diminish as more settlements are realized via negotiation.  The company's growing inventory facilitates those types of transactions because the counter parties can resolve all their loose ends at once,  Acacia substantially expanded its patent portfolio over the past two years, laying the groundwork for an acceleration of deals in upcoming periods.  We have reduced our 2013 earnings estimate to reflect the higher than expected costs associated with the Apple settlement.  But a strong performance appears to be in the cards, nonetheless.  Growth is poised to remain vibrant in 2014 and beyond as the company's newer portfolios start producing income, and new technology is added.  Legislative threats appear insignificant despite periodic bursts of rhetoric.

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Simulations Plus ( Nasdaq - SLP ) -- Steady Growth Re-Established

Simulations Plus (SLP $4.00) reported good Q2 (Feb.) results.  Earnings rose 17% to $.07 a share.  Sales improved 12% to $3.12 million.  The renewal rate was 93%.  Eighteen new customers were added.  The company had hoped to land a big contract with the Gates Foundation in the period.  That proposal was rejected.  Other funding partners are being pursued for the company's malaria project.  New software products will be launched over the next two quarters, expanding the potential market.  Simulations Plus remains reluctant to make acquisitions, which would provide a more dynamic growth opportunity.  Investors can realistically stay invested although appreciation is likely to be muted in relation to the company's inherent potential.

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Acacia Research ( Nasdaq - ACTG ) -- Apple Computer Settles

Acacia Research (ACTG $29.00) appears on track to report excellent Q1 results.  The company settled its case with Apple Computer before the quarter ended.  That transaction likely was higher than previous deals with Microsoft and Samsung.  Apple also indicated it was considering further transactions with the company, including partnerships with Acacia to enforce its own patents.  Several other large deals were concluded in the March quarter.  Another major partnership was established in early April, moreover, laying the foundation with further growth beyond.  Most of Acacia's business continues to derive from the wireless and computer areas.  New initiatives begun over the past year in medical, automotive, and energy technology promise to kick in as 2013 goes along.  Our estimates are unchanged.  But a stronger performance is possible.

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