LRAD ( Nasdaq - LRAD ) -- Sounds Great

LRAD (LRAD $2.75) is a leading manufacturer of long range accoustic devices used in military and public safety applications.  The company's high tech bullhorns deliver focused beams of sound over distances up to three miles.  That allows military and public safety personnel to provide specific messages instead of warning blasts or garbled instructions.  The genesis of the technology was the near sinking of the USS Cole, a Navy vessel that Arab terrorists damaged in 1997.  LRAD was recruited by the Pentagon to develop a system that could talk over all the noise ships make on the water.  The terrorists attacking the USS Cole were able to plausibly pretend they didn't understand the Navy's order to stop.  With LRAD's technology, that excuse no longer works.  Sound is focused in a narrow beam.  Machines can be made larger or smaller, depending how much range is desired.  Operation is simple.  Turn it on - point - adjust the volume - start talking.  The components are solid state.  Reliability is high.

Military business drove sales in the company's early years.  The U.S. Navy was an especially big customer.  The Coast Guard and Army adopted the technology, as well.  Civilian demand expanded as time went on.  Police departments and other public safety groups used the systems to deliver verbal messages.  But a new application also emerged -- pure noise.  Police began using the systems for crowd control.  In the 1950s they used water hoses.  In the 1960s it was tear gas.  In the 1980s rubber bullets became popular.  LRAD's technology offered a less dangerous and more reliable solution.  Ear splitting noise makes crowds disperse, without injuries.  Demonstrations in Ferguson, Missouri were broken up with the company's systems.  They weren't used in Hong Kong.  But the local police had them ready.

Applications are proliferating.  Commercial customers employ the systems to guard facility perimeters.  Those often are integrated with motion detectors.  Portable machines can be loaded on helicopters so authorities can instruct people where to go during floods, fires, and other calamities.  A new line, the "sound barrier," is built into limousines used by diplomats in foreign countries.  When locals surround the car and beat on the windows, a blast of sound sends them running.  There are no casualties on either side.

Foreign sales have propelled growth since the Republicans gained control of the House of Representatives in 2010.  Congress has been unable to pass a budget since that time.  Funding has been sustained exclusively under continuing resolutions.  LRAD has been able to sell systems under previously established programs.  But no additional programs have been possible without new budget authority.  Foreign navies, coast guards, and police have adopted the technology, though.  And that trend remains in an early stage of development.  The recent Republican capture of the Senate means a budget could be passed in 2015.  Several programs are in development.  Continuing resolutions meant continuing R&D.  Those include outfitting drones with LRAD systems, among a variety of other things.  Orders promise to accelerate next year if the military budget expands, the LRAD systems are included, and President Obama doesn't veto everything.

The mass notification market promises even greater long term potential.  Approximately $6 billion per year is spent around the world on public loudspeaker systems.  Authorities rely on them to warn citizens of impending danger, like an air raid.  More commonly, they're used for tornadoes, fires, or, in the Middle East, to announce it's time to pray.  The installed base generally is old and in need of repair.  An upgrade cycle is underway.  LRAD's new "360" systems offer superior sound quality, lower costs, and greater versatility.  That line employs multiple speakers to direct sound in all directions.  New markets are opening up, including universities.  Schools need a way to respond when gunmen strike.  LRAD's units provide a means for telling people what to do, rather than just send out a general warning.

LRAD is down to the wire on two particularly large "360" deals in the Middle East.  Landing one almost would certainly fuel a major sales gain in fiscal 2015 (Sept.)  It also would provide a helpful reference account, setting the stage for additional contracts.  The company expects to find out before the end of the calendar year on both proposals.  Each is in the $8-$12 million range.  U.S. military business promises to bolster performance in the year ahead, as well.  And international growth is likely to remain robust.  Competition exists.  But no other company offers comparable sound quality.

We estimate income will advance 75% in fiscal 2015 (Sept.) to $.14 a share.  Sales could advance 40% to $35 million.  Explosive gains could follow in succeeding years.  Three activist shareholders sit on LRAD's five member board.  Once the company breaks into the mass notification market a sale of the company to one of the current industry leaders is possible.  Assuming the company remains independent sales could reach $75-$100 million in 2-3 years to provide (fully taxed) earnings of $.25-$.45 a share.  Tax loss carryforwards shelter income, so cash flow would be greater.  Applying a P/E multiple of 20x to the midpoint suggests a target price of $7.00 a share, potential appreciation of 155% from the current quote.

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Xplore Technologies ( Nasdaq - XPLR ) -- Ready to Rumble

Xplore Technologies (XPLR $5.50) is a leading manufacturer of  tablet computers for business and military applications.  Its rugged systems withstand heat, vibration, water, and jarring drops better than consumer tablets.  They also have superior displays and a variety of special purpose inputs and processors to accommodate customer specific add-ons.  Xplore concentrated on the high end of the market until recently, selling the extremely rugged (Windows based) XC6 at prices ranging from $5,000 to $6,500 apiece.  Those machines remain in strong demand for environmentally challenging applications, particularly in the military area.  The company recently introduced two lower priced systems for the business market.  Many users are converting from notebook computers to tablets for ease of use and maintenance savings.  Consumer tablets, like Apple's iPad, have proven to be easier to carry and use than notebooks.  But they've tended to break easily, too, creating expensive downtime and repair bills.  Many large companies now are transitioning to more rugged tablets, like the ones made by Xplore, to reduce the cost of ownership while preserving the tablet's operational advantages.

A low-cost Android version ("Ranger") was released last year.  A major U.S. telecommunications provider placed a huge order for one of its divisions.  Pricing is approximately 33% of the high end XC6.  Google doesn't charge license fees for the Android operating system.  The physical characteristics of the machine are less robust than the XC6, as well.  For instance, the Ranger can survive 30 seconds under water; the CX6, 2 minutes.  The Ranger can keep working after a 5 foot fall onto concrete; the CX6 can handle a 10 foot drop.  For the field service applications the telecom had in mind, the Ranger was ample.

Last spring Xplore launched a low cost Windows unit ("Bobcat").  That system costs more than the Ranger, because Windows licensing fees are required.  But demand appears to be much greater.  Most corporations run their computer systems on Windows.  It's less expensive overall to pay a little more for the machines rather than rewrite large computer programs to operate on Android.  A dozen or more major prospects have been conducting Bobcat field trials.  Substantial orders now are rolling in.

September quarter results probably will be unexceptional.  Bobcat shipments will be low because most customers still were in the testing phase during the period.  Some of those units were provided as demos, moreover, and weren't recognized as sales.  The big Android telecom buyer also scaled back purchases temporarily.  It had to rewrite some software, delaying the full rollout.  That project now is complete.  The rest of the order will start shipping in the December quarter.  Sales to additional divisions appears likely next year.  Bobcat sales are mounting in the December period, as well.  And military orders for the CX6 remain vibrant.  That machine already is specified by several high profile programs, which are ramping up again as hostilities flare in the Middle East.  Xplore's lower cost Bobcat might do the trick but that would require extensive testing, which would delay production.

We estimate sales could approach $15 million in the third (December) quarter.  A similar level appears realistic for the March period.  For the entire year sales could attain $45 million (+26%) to provide (fully taxed) earnings of $.25 a share.  Next year all three lines promise to expand.  The Bobcat and Ranger offer the greatest potential.  Sales could advance 45% to $65 million.  Income could rise faster, as margins expand, to $.60 a share (+140%).  

Xplore faces two direct competitors -- Panasonic and a Taiwan computer manufacturer.  Neither participates in the Android segment.  And while both do well in the Windows area, they sell standard systems at elevated prices.  Xplore offers more customized solutions, which appeal to customers with unique applications.  The industrial tablet market is approximately $500 million in the United States.  Market research forecasts see it expanding to $1-$2 billion over the next 3-5 years, if not sooner.  Xplore doesn't do business overseas for now.  Export opportunities could emerge down the road.

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IPG Photonics ( Nasdaq - IPGP ) -- New Applications Drive Growth

IPGP Photonics (IPGP $70.00) is the leading manufacturer of lasers that use fiber optics to deliver the beam.  Older technologies rely on CO-2 and YAG crystals.  Those technologies dominated the $4.5 billion industry four years ago.  IPG had been developing its systems for a decade prior to that, achieving success in niche markets that appreciated its smaller form factor and more precise tuning.  In 2011 the company was able to match its competitors selling prices, precipitating an explosive sales acceleration.  Costs have continued to decline, allowing fiber to establish a dominant position in several key industry segments.  Additional parts of the industry now are adopting fiber, as well.  IPG also is elbowing out non-laser technologies in a growing range of manufacturing operations.  Competitors are attempting to replicate IPG's success.  But the company has such a lead with key components and system integration know-how that those offerings are barely competitive in the low end.  And the company still remains largely without direct competition in the high power segment, the most profitable part of the business.

New applications are expanding IPG's horizons.  Cutting metal has been the largest sales driver to date.  Welding now is becoming a major contributor, as well.  A variety of fancier uses is emerging to provide further leverage.  Those include oil drilling, 3-D printing, brazing, coating, and engraving.  Non-manufacturing applications represent only 5% of sales currently.  But those are poised to expand over the next few years, as well, particularly in semiconductor processing, medical applications, and telecommunications.

Demand is strongest in Europe and Asia, especially China.  The U.S. accounts for approximately 10% of sales.  Core applications in both of those international regions continue to perform well despite reports of macro-economic problems.  New products are reinforcing that expansion.  Cash flow is positive, fueled by pretax margins that routinely exceed 35%.  That allows IPG to respond quickly and effectively when competitive threats develop.  Over the past year upstart producers in China cut into IPG's low end marking business.  The company engineered a low cost line of its own, with regular margins, that turned back the tide.  Traditional laser manufacturers have been attempting to break into the fiber business.  They've succeeded to a degree with specialized products sold to longstanding customers.  Margins are believed to be tight on those units, though.  And IPG stands ready to make selective price cuts if it becomes necessary to turn the screws.

We estimate 2014 sales will advance 17% to $760 million.  Earnings appear on track to rise 22% to $3.85 a share.  Margins probably will benefit 1.0% this year from favorable currency moves.  Much of the company's production is based in Europe.  The euro's decline is lowering costs.  Next year sales could improve 15% to $875 million to support a 12% gain in earnings to $4.30 a share.  Our estimates assume margins return to normal.  IPG has a $500 million war chest that might be deployed for acquisitions.  The company has been unable to find what it wants to date.  It's been looking for a while now, so a purchase in the laser segment has become increasingly less likely.  But a move into a related business remains a possibility.  3-D manufacturing, for instance, might provide a high rate of return on the surplus cash now being generated by the fiber laser business.  If nothing emerges, a stock repurchase or dividend program could be established.

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Cognex ( Nasdaq - CGNX ) -- Big Deal

Cognex reported unusually good Q3 results.  One customer bought $65 million of the company's machine vision systems, propelling total sales ($169.4 million) up by 87% year to year.  Earnings followed suit.  Cognex provided modest price concessions to the large buyer, causing its gross margin to narrow to 74%.  The company usually reports that metric in the 75%-80% range.  Overhead costs went up some, too, but not nearly as much as sales.  So operating income accelerated, driving earnings ahead by 126% to $.59 a share.  Business was excellent even if the large shipment was excluded.  Sales rose 15%, fueled by continued expansion in the factory automation sector.  Cognex did well to keep the rest of its operation intact despite the distraction created by the big transaction.

Fourth quarter performance won't benefit from the unusual contract.  Activity remains vibrant in all keys markets including the U.S., Europe, China, and other parts of Asia.  But a more conventional set of numbers is expected to be reported.  For the year we estimate earnings will finish around $1.45 a share (+56%) on sales of $485 million (+37%).

More large orders are possible in 2015.  Cognex is pursuing several opportunities that may not be quite as large as the one delivered this year, but they could be in the $50 million range.  The existing customer may outfit additional facilities, moreover, generating sizable repeat business.  Smaller customers might not generate the same kind of numbers individually.  But if they start installing machine vision throughout their operations, instead of just in specific applications, average order size could expand across the board.  Several new products and upgrades have been introduced, creating more versatility along with performance improvements.  New markets, logistics in particular, are being opened up, as well.

We estimate 2015 ales will advance 12% to $545 million.  Earnings could expand a little faster (+14%) to $1.65 a share.  Most Wall Street analysts are not inclined to think more large orders will materialize.  Their numbers are lower.  Machine vision remains in an early stage of development, though.  If the technology proliferates to its full potential in the manufacturing area, stronger results are possible.  Long term, the opportunities are almost endless.  Vision will be a central requirement to make machines of all kinds more autonomous and useful.  Cognex has amassed large cash reserves which could applied towards those opportunities.  Most likely the work will be done internally, although technology acquisitions could facilitate the process.

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Zix Corp. ( Nasdaq - ZIXI ) -- Hard to Read

Zix Corp. (ZIXI $3.25) is a leading provider of email encryption services.  Approximately 50% of revenue is generated by the health care industry, which is required by law to scramble patient records when they are transmitted over the Internet.  The financial industry provides another 25%.  Legal documents represent a large part of the rest.  Last year Zix expanded its product line with a cloud based system that inspected every email and attachment that left a corporation's network.  If key words or phrases were identified the message was sequestered for review by an administrator.  The company also launched a bring-your-own device ("BYOD") cloud based system last spring.  That service allowed employees to access email accounts and other corporate files with their mobile phones, without actually storing any data on the phone itself.  Zix hoped to displace competitive technologies that loaded software directly onto the employee phones.  When suspicions arose the boss could look at everything on the phone and even wipe it clean.  Zix's approach kept everything in the cloud.  It looked like a winner.

In the wake of Edward Snowdon's revelations it appeared the encryption line would expand its reach, as well.  Despite expanded marketing efforts, though, none of the company's products have shown any acceleration.  In fact, new orders unexpectedly hit an air pocket in the September quarter.  Revenues are recurring.  And the renewal rate is high.  So reported results are likely to stay intact.  But a major upswing has become a less certain outcome.

Zix probably will report some good quarters over the next 2-3 years.  And even the bad quarters won't be terrible.  New orders in the September period, as low as they were, probably exceeded cancellations on existing contracts.  Widespread adoption of the technology may never happen, though.  Corporate technology spending is tight.  There are lots of competing programs.  Encryption is certain to be used for critical applications.  But it may turn out to be one of those good ideas that never completely catches on.

The stock price is near where we originally recommended it.  Our advice is to sell the stock and redeploy the proceeds in a Special Situation with better defined growth prospects.

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RCI Holdings ( Nasdaq - RICK ) -- Takes Off

RCI Holdings (RICK $11.00) operates a network of 41 adult nightclubs.  The largest concentration is in Texas.  But the company has locations a number of cities from coast to coast.  Good looking women are the prime attraction.  RCI generates income in a variety of ways.  Liquor is the most profitable.  The girls who work at the clubs are independent contractors who typically pay the club for the chance to perform there.  Their income is provided by tips, which customarily are high.  RCI manages a broad spectrum of properties.  High end clubs in New York City and Miami are especially profitable.  Successful clubs also are owned in oil producing areas.  Those have benefited from the industry's expansion over the past several years.  RCI aims at less affluent customers, too.  That segment of the market nosedived with the 2007-2008 recession and still hasn't recovered completely.  Adult entertainment is a discretionary item.  Income disparity is a significant factor affecting demand.

RCI has reorganized its nightclub base to follow the changes in consumer spending.  Store level operations have been modified, as well.  Major investments were made in upscale markets to attract high income patrons.  Those have proved highly productive.  RCI also has moved away from the discounts it used to maintain traffic in the recession's aftermath.  That effort bolstered profit margins at some clubs but had negative impacts in lower income areas.  Under-performing locations now are being sold off, which should enable overall margins to improve further.

RCI recently branched out into the conventional restaurant business.  The company has launched four "Bombshells" to date.  Two more are under construction.  That segment is profitable at the store level with average annual sales approaching $4 million per unit.  Start-up costs are holding back reported earnings.  The new line promises to diversify risk while opening up a promising growth opportunity.  A move into franchising could provide further leverage down the road.

RCI owns the real estate where all its adult nightclubs operate.  Licenses to operate almost always specify a single location.  The company can't risk losing its lease, because it would have nowhere to relocate.  Debt is high ($69.3 million), as a result.  Fixed assets, mostly real estate, are carried on the books at $112.7 million.  Market value is believed to be higher.  RCI plans to simplify its capital structure by spinning off the real estate and related debt into a REIT, which the company itself will manage.  Shares in the REIT ("real estate investment trust") will be sold to investors in a private offering.  The company hopes to net approximately $50 million in cash ($4.50 a share), while extinguishing its mortgage liabilities.  Future earnings will be reduced by lease payments to the REIT.  But those are expected to be similar to the company's current mortgage interest outlays.  Earnings are unlikely to be reduced materially.  And RCI will have $50 million in extra funds to work with.

Meantime, margins and same store sales are improving.  Jettisoning the under-performing units plus the move into upscale markets helped same store revenue increase 6.9% in the September quarter.  Earnings have not been reported yet.  But they likely showed solid gains, as well.  We estimate earnings advanced 16% to $1.25 a share for the fiscal year (September).  Bombshells start-up costs and discontinued operations probably offset margin improvement in other areas.  Next year a 28% improvement to $1.60 a share appears achievable.  A stock repurchase program could provide additional leverage.  Our estimates don't reflect any use of the REIT proceeds.  The company has not indicated how it plans to deploy those funds but acquisitions, dividends, and higher buybacks are possibilities.

In 2-3 years earnings could achieve $2.35-$2.95 a share.  Applying a P/E multiple of 15x to the midpoint of the range suggests a target price of $40 a share, potential appreciation of 260% from the current price.

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Cyanotech ( Nasdaq - CYAN ) - Sees Daylight

Cyanotech (CYAN $4.55) is a Hawaiian based producer of specialty nutritional supplements.  Both of the company's products are strains of algae that thrive in the abundant sunlight that Hawaii provides.  Competitors exist.  But Cyanotech is the market leader in both segments.  Astaxanthin accounts for two-thirds of sales and currently is the faster growing product line.  Demand surged a few years ago after Dr. Oz recommended it on his widely viewed television show.  Sales have continued to advance since that time.  Astaxanthin reduces sunburn, joint pain, and macular degeneration.  It also contains anti-aging properties ("antioxidents").  Spirulina, the company's second product, is popular among serious athletes because it improves recovery time after strenuous workouts.  It also possesses large amounts of antioxidents.

Both lines are cultivated in outdoor growing ponds.  Production rises during the summer and falls in the winter due to the amount of sunshine available.  Cyanotech has developed a repeatable process that generates fairly consistent results.  Last year production was impacted by an unusual series of storms.  But weather conditions usually are excellent in Hawaii.  Technical innovation is helping to increase production at the company's existing facility, moreover.  The Obama Administration, as part of its stimulus package in 2009, spent billions in an attempt to develop algae based biofuels.  That effort fell flat.  But the research generated several new strains of astaxanthin with higher yields than Cyanotech's legacy version.  Last year the company established a relationship with one of those research groups.  Several new strains have been tested.  Three have demonstrated significantly higher yields with the same medicinal benefits.  They now are being introduced into more growing ponds.

Output per acre is expanding, too.  Over the past year Cyanotech reduced the size of a few growing ponds in a pilot program.  The algae concentration remained the same.  Total output was identical.  The company now is modifying more ponds to the shorter format.  Once that's completed it plans to construct additional ponds on the excess land created.  Cyanotech also has an option to lease an adjacent property, which could support further expansion.

Cyanotech has shifted its focus towards the consumer market.  For most of the company's history Cyanotech sold its output to other companies that combined it with additional ingredients.  When new management took the helm three years ago Cyanotech began to emphasize the retail channel, developing its own brand of pure astaxanthin.  Bolstered by the Dr. Oz publicity the company has gained more than 50% of the consumer market.  Most sales currently are made through specialty health food stores and similar internet sites.  Over the past year, though, the company has added larger retailers including Vitamin Shoppe, Whole Foods, and Sprouts to its network.  A test with Costco recently was started, moreover, which could amplify performance further.  Margins and revenue from consumer products are higher than on the old bulk sales.  Results promise to accelerate as the transition continues, reinforced by the larger retail partners.

Earnings were virtually erased over the last two years by costs associated with a patent lawsuit.  Cyanotech declined to settle the case, which would have required it to supply astaxanthin in large quantities at bulk prices.  The tables appear to have turned in Cyanotech's favor as the discovery process continued.  The patent in question hasn't held up under scrutiny.  The company still would prefer to settle the case.  But if it does go to court -- a date is scheduled for next March -- Cyanotech could win a large monetary award, in addition to ending the legal outlays.

Reported earnings promise to surge once the legal expense ends.  We estimate income (fully taxed) could jump to $.60 a share next year and keep advancing at a fast pace beyond.  In 2-3 years earnings could reach $.80-$1.00 a share.  That assumes additional stock will be sold to finance growth.  Applying a P/E multiple of 20x to the midpoint of the range suggests a target price of $18 a share, potential appreciation of 295% from the current quote.

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Health Insurance Innovations ( Nasdaq - HIIQ ) -- Expands its Platform

Health Insurance Innovations (HIIQ $12.75) is a leading provider of short term medical plans.  It provides ancillary products, as well, including hospital indemnity, pharmacy, vision, and dental insurance.  A growing percentage of customers bundle more than one plan.  The company works with several major carriers like ING, Cigna, Nationwide, and U.S. Fire.  Those companies provide the actual underwriting.  Health Insurance Innovation works with them to design the products.  Primarily, though, it acquires the customers through its own agents and an external network of more than 100 call centers.  A variety of marketing techniques drive business to those sites.  The short term policies offered by the company are significantly less expensive than comparable Obamacare plans (excluding subsidies).  They normally extend for 6-11 months, making them exempt from the new law's stipulations regarding pre-existing conditions and guaranteed issue.  For healthy individuals, they provide attractive coverage because the same services are provided and the price is much lower, often as much as 40%-50%.  In the past a lot of prospective customers were reluctant to buy short term medical plans because they couldn't be renewed automatically.  That's still the case.  But under the new law if a chronic disease is acquired an individual can switch to an Obamacare policy, ensuring treatment.  Most of Health Insurance Innovation's customers are young and healthy.  Fewer than 5% are prevented from renewing due to health factors.  Those people now can buy a guaranteed issue plan on an exchange, eliminating that small risk.  Business has accelerated during the first half of 2014 as a result.

A recent acquisition will broaden Health Insurance Innovations' potential market.  The company has been working with Health Pocket, the new unit, for the past six months.  Much of the acceleration in growth the company has enjoyed is due to that relationship.  Health Pocket offers a database for consumers that contains virtually every health insurance policy for sale in the United States.  An easy to use interface enables potential buyers to search by key variables including price, deductibles, doctors, disease coverage, and geography.  Once a prospect narrows down his choices a toll free number appears, directing him to an agent who can explain the details and determine the right deal.  A click to chat option is available, as well.  The percentage of callers who purchase is much greater compared to callers responding to banner ads and other general promotions.  Growth in new business has topped 100% at Health Insurance Innovations over the past two quarters, driven in part by Health Pocket's high quality sales leads.  That trend in the short term medical segment appears likely to continue.

The Health Pocket deal will open up the Medicare Advantage and Small Group segments, as well.  Health Pocket currently is diverting those leads to other companies, earning a small commission.  Health Insurance Innovations plans to steer them to its own agents and affiliated call centers, sharply raising revenue per policy.  Customers who are best served by Obamacare plans, due either to the likelihood of subsidies or other factors, will be directed to the appropriate exchange.  Those deals will generate a modest commission.  The Medicare Advantage and Small Group markets each are at least 500% larger than the short term medical segment.  Revenue could exceed the short term business in 2-3 years, perhaps sooner.  Margins promise to be similar.

Profitability is likely to widen as volume expands.  In-house agents and external call centers earn commissions on the business they close.  Those expenses are variable.  But Health Insurance Innovation's technology platform is highly scalable.  Those costs are likely to increase far less rapidly than sales.

Our 2014 estimates assume that consolidation expenses will temporarily impact profits.  Some non-recurring costs are inevitable as the two companies officially join forces.  Health Insurance Innovations already is spending heavily on sales and marketing.  Those efforts might be reorganized to put some weight behind the Medicare Advantage and Small Group initiatives.  But the total amount spent may not expand too much.  If they do, earnings may finish below our forecast of $.40 a share.  (Prior to the merger we had estimated income of $.55 a share on $80 million in sales.)

Next year sales could advance 67% to $150 million to provide income of $.95 a share.  New business may climb at an even faster pace.  Revenue is recognized on a month to month basis, though, so even if a mountain of policies is written the recognition of that business will be spread out.  Medicare Advantage and Small Group plans ordinarily renew at a higher rate than short term policies, creating the potential for additional leverage down the road.  In 2-3 years revenues could attain $250-$300 million to yield income of $2.05-$2.65 a share.  Applying a P/E multiple of 20x to the midpoint of that range suggests a target price of $47.00 a share, potential appreciation of 265% from the current quote.

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Northern Technologies International - Rust Never Sleeps

Northern Technologies International (Nasdaq: NTIC $20.45) is a leading provider of anti-corrosion technology and solutions. The company mixes its formula with plastic pellets to create plastic sheets, which can then be formed into bags of various sizes. Parts are placed into the bags to inhibit vapor corrosion. The chemicals inside the bags release gases that will settle on the parts, keeping them protected. Once the bag is opened, the chemicals will evaporate. The company also sells to oil and gas companies, both to preserve flanges on ocean rigs and to safeguard oil storage tanks.

Northern Technology initially sold its products to automobile manufacturers. The company's offering is an alternative to "dipping lines," a method where car parts were coated in grease to protect them from rusting during transit and storage. Dipping tanks take up space and also present fumigation and fire hazards. Also, dipped pieces have to be cleaned off before being put to use.

Corrosion costs companies around the world roughly $300 billion per year. Of that amount, losses in the oil and gas industry total about $126 billion. Northern Technologies currently generates 9-10% of its revenue in the oil and gas sector. The company expects this business to grow faster than its core business, based on increasing demand and not much in the way of direct competition.

Nothern Technologies has two primary opportunities when it comes to the oil and gas industry. The first is protecting flanges on off-shore oil rigs. These rigs have miles of pipes that are connected by these flanges. Left unprotected, flanges generally need to be replaced in a matter of months. Rust and corrosion can  prevent the flanges from opening or closing, and a malfunctioning flange can lead to disaster in the event of an emergency. Revenue from an oil rig depends on the size of the rig and the number of flanges that can be treated. Some flanges operate at a high temperature that would compromise the corrosion inhibitor. Northern Technologies  generates about $50 in revenue for each flange it treats. Larger oil rigs can have around 8,000 flanges.

The company also treats oil storage tanks. The crude oil that's stored in these tanks usually isn't in there alone -- significant amounts of sulfur, water, and other contaminants like to crash the party. The sulfur and water can combine into hydro-sulfuric acid, that is very damaging to the tanks. It can cost a company millions of dollars per day to take a tank out of commission for repair or replacement. The company charges $25,000 on average for a tank job, but it ranges from $10,000-$100,000 depending on the size of the container.

Nothern Technologies operates with a number of joint ventures. The business model is derived from the Coca-Cola system, so the company ships the "secret ingredient" -- in this case, the chemical additive -- to its partners, and lets them deploy it in projects worldwide. There is a basic understanding that Northern Technologies will provide ongoing technical support to its joint ventures, including R&D. The joint ventures are responsible for sales and marketing in their respective territories. Northern Technologies pays taxes in the countries its joint ventures operate in, and receives foreign tax credits in the US. It is responsible for any difference between the foreign rate and the US rate.

Price negotiation can be impacted by the customer's circumstances. In 2004, one U.S. automaker learned the value of Nothern Technologies the hard way. The automaker decided to shift to a Chinese part supplier to cut costs. The problem was that this new supplier had very little experience in shipping these parts overseas and didn't take proper precautions. The parts passed through essentially every type of climate imaginable on the route from Northern China to Detroit. The parts were useless upon arrival, and the carmaker had to have new parts delivered via air freight to prevent production lines from shutting down. The automaker wound up losing billions of dollars that year. The company then hired Northern Technologies to work with the manufacturers in China and ensure the parts could be safely shipped by sea. In this case, Northern Technologies was able to negotiate a very favorable deal, because the automaker didn't have much of a choice.

Earnings per share have increased 58.8% since 2010, from $0.51 to $0.81 in 2013. We project earnings will finish 2014 at $1.05, and we have set a 2-3 target of $2.20-$2.80 per share. Applying a P/E ratio of 20 to the midpoint of that range suggests a target price of $50 per share, an appreciation of 145% over the current price. Revenues figure to be in the neighborhood of $28 million for 2014, per the company's guidance, a 24.4% increase over $22.5 million in 2013.

Eric Ramsley

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Apollo Medical - Nothing but Net

Note:  This is a "guest column" written by a friend of Growth Stock Insider (Jody Cain of Financial Profiles).  The information has been obtained from sources believed to be reliable but it is not guaranteed either bgy the author or Growth Stock Insider.

Apollo Medical Holdings, Inc. (ApolloMed) (AMEH: $0.53) is a leading integrated healthcare services company for patients, hospitals, health plans, physicians and other key healthcare stakeholders. ApolloMed’s mission is to provide high-quality, cost-effective inpatient and outpatient care for all patients with a particular focus on acute, high-risk and senior populations.  In addition to providing hospitalist, ICU and physician advisory services at more than 50 hospitals, facilities and clinics, ApolloMed provides medical management and care coordination for more than 1,000 physicians and tens of thousands of patients through its value-based, results-driven solutions. ApolloMed has been providing the solutions that lead to measureable results for nearly a decade and has core networks in California, Ohio and Mississippi.

ApolloMed is successfully capitalizing on changing healthcare dynamics:  ApolloMed’s goals are aligned with the current industry dynamics of providing high-quality, cost-efficient healthcare services.  Healthcare costs currently top $2.7 trillion in the U.S., representing about 18% of the total U.S. GDP, with more than 50% going to hospitals and physicians.  These costs continue to rise, driven in part by increasing numbers of older Americans who account for high levels of healthcare expenditures, and by more Americans gaining healthcare coverage under the Affordable Care Act.  Fee-for-service healthcare plans lead to inefficiencies based on the absence of a comprehensive, integrated approach.  Health plans are moving away from the fee-for-service framework to a more integrated accountable care model.  ApolloMed has the capability to assume a full range of financial risk offerings.

ApolloMed has a proven ability to grow healthcare networks:  ApolloMed offers inpatient and outpatient solutions and has undergone rapid growth by building networks that include hospitalist services, Accountable Care Organization (ACO), independent physician associations (IPA) and outpatient clinics.  The company is validating its model by developing partnerships with industry leaders, including Fresenius Medical Care for end-stage renal disease and a strategic partnership; Boehringer Ingelheim for COPD chronic care management; and Rite Aid for community-based health treatment for patients with chronic and poly-chronic conditions.

Driving revenues through “Best in Class” medical management and operational efficiencies:  ApolloMed provides the management and data analysis infrastructure to support improved case management and physician-led programs.  The company’s incentive are aligned with physicians and hospitals.  Its financial risk offerings include Low Risk through traditional contract billing or physician staffing through hospitalists services and clinics (more than 80% of fiscal 2014 revenues); shared savings through its ACO, which is a 50/50 split in cost-savings with Medicare (ApolloMed showed a $3.1 million preliminary interim cost savings with potential distribution in 2H14); and partial and full Risk through its IPAs. This is a capitated model with health plans providing a per-member/per-month fee and ApolloMed’s IPA assuming all responsibility for patient care and financials.

ApolloMed is positioned for aggressive growth through its defined strategy.  The company strengthened its balance sheet to support growth through a strategic investment from partner Fresenius Medical Care for up to $12 million announced in April 2014.  The investment includes $2 million in equity at $1 per share, which is 2Xs the current stock price.  The company is focused on strategic acquisitions and partnerships that expand its network and service offerings.  The company is also looking to improve the economics of its ACO and IPA through its increasing scale.  The company has developed a platform and infrastructure that can be replicated in additional geographies. 

ApolloMed is physician led by Chief Executive Officer Warren Hosseinion, M.D., who founded the company with Chief Medical Officer Adrian Vazquez, M.D. in 2001.  Recently the company announced the appointment of Mitchell R. Creem as CFO, who is a seasoned healthcare executive with more than 30 years of industry experience, including CEO for the Keck Hospital of USC and USC Norris Cancer Hospital and Associate Vice Chancellor and Chief Financial Officer for the UCLA Medical Science.  Senior management is rounded by Chief Strategy Officer Mark Meyers, who has more than 30 years of healthcare experience and is the former Senior Vice President of Operations for Dignity Health.

This blog contains certain forward-looking statements with respect to Apollo Medical Holdings, Inc.  Forward-looking statements are statements that are not descriptions of historical facts and include statements regarding management's intentions, beliefs, expectations, plans or predictions of the future, within the meaning of the Private Securities Litigation Reform Act of 1995. Because such statements include risks, uncertainties and contingencies, actual results may differ materially and in adverse ways from those expressed or implied by such forward-looking statements. Additional information concerning Apollo Medical Holdings, Inc. and its business including additional factors that could materially and adversely affect its financial results including, but not limited to, the risks described in its annual report on Form 10-K and in other filings with the SEC.

Carbo Ceramics ( NYSE - CRR ) -- Opens the Hole

Carbo Ceramics (CRR - $140) is the leading producer of ceramic proppants used in oil and gas fracking.  Today's horizontal drillers crack open underground rock formations to retrieve oil and gas.  The proppants keep those fractures open under extreme pressure.  Many land based wells are 8,000-10,000 feet deep.  Carbo has experienced a series of ups and downs over the years.  Natural gas prices collapsed a few years ago, causing overall activity to fall.  During a boom prior to that proppants fell into short supply, encouraging a swarm of Chinese competition.  The hoopla over fracking has generated competition in South America and elsewhere, too.  Most of those operators hoped to cash in on local energy projects.  International development has been slow to emerge, though for geological, political, and economic factors.  Some of that material gravitated to the United States, as well.

Carbo mounted a campaign to illustrate its products' price performance advantage.  That took some convincing.  Fracking operators have been focused on reducing costs to compete with "black oil" producers like the Saudis in the event an over supply condition arose.  That remains a primary emphasis.  But Carbo has persuaded a growing number of producing companies that its products may cost more, but they generate far more production than Chinese and other lower cost alternatives.

A new manufacturing technology could separate Carbo from the pack even further.  Its new Kryptosphere line is designed for extremely deep offshore deposits.  Huge oil and gas reserves are believed to exist offshore.  Standard straight down drilling, like the Horizon rig used before it exploded, is economic.  But horizontal fracking offers even greater rewards.  Up to now nobody had the proppants to make it feasible.  Carbo currently is demonstrating the new line to prospective customers.  Commercial introduction is scheduled for 2015.  A similar but less expensive version is being prepared, as well, for land based wells.  Pricing details remain secret.  But Carbo is intimating that costs won't be much higher than its existing products despite the performance improvement.

Meantime, poor weather affected Q1 financial results.  Drilling in North Dakota was stymied, reducing proppant demand.  Railroad bottlenecks contributed further problems.  Even so, earnings rose 6% on a 1% sales gain.  Sequential improvement is likely in upcoming periods.  Oil drilling remains robust.  Natural gas prices surged over the winter, moreover, and appear to be holding up at attractive levels.  That could encourage greater drilling activity.  The Obama Administration remains adamant in its opposition to LNG (liquified natural gas) exports.  That policy might change after the 2016 election, though, both for economic and geopolitical reasons.  Long term, international fracking promises additional leverage.

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Zix ( Nasdaq - ZIXI ) -- Building a Secure Future

Zix (ZIXI $3.35) is a leading provider of e-mail encryption that protects sensitive information during transit.  The company sells its technology on a recurring revenue basis.  Customers who send encrypted messages pay the company approximately $20 a year per user for unlimited messaging.  Recipients can receive encrypted e-mails without charge by registering in the company's directory.  Any code can be broken if sufficient computer horsepower is applied.  From a practical standpoint, though, Zix's technology is safe from hacking.  Healthcare and financial institutions represented 72% of revenue in the latest quarter (March).  Renewals represent about 90% of revenue.  The renewal rate is approximately 100%.  New seats at existing customers offset losses.  Organic growth is 10%-15% a year.

A re-seller agreement with Google has caused performance to slow.  The huge search engine provider also sells an anti-spam and virus protection service to corporate clients.  It licenses Zix's email encryption technology to include in the bundle.  Google reorganized that service early in 2013.  A variety of back-end issues arose, causing sales of Zix's products to decline from 20% of Zix's annual sales to less than 10% in the latest quarter.  The infrastructure appears to have been reestablished.  But Google still is handling new orders by hand, for select large accounts, rather than through automation.  The system is ready to be turned on again.  But it remains to be seen when the Google channel will resume full speed.

A high potential new product remains in an early stage of development.  Last fall Zix launched a cloud based "bring your own device" (BYOD) security package.  The software allows employees to use their personal phones to send and receive company email, without any of it actually being stored on the phone itself.  That way if the phone is lost no proprietary information is jeopardized.  Several alternative technologies already are on the market.  Those are software packages that reside on the phone.  Besides creating privacy issues, pricing is higher because different software has to be written for hundreds of phone models.  Zix's is a single platform that operates in a cloud computing format.

Only 68 companies have been signed up to date.  Most still are in the testing stage.  Pricing is similar to email encryption, around $20 per user per year.  Zix boosted its sales force by 40% last year to get the new "ZixOne" line rolling.  A large number of evaluations are underway.  If the technology gains general acceptance the user population could jump into the millions, similar to encryption.  Margins could widen on the incremental volume, moreover, leading to superior earnings gains.

For now, the Google problem combined with the uncertain "ZixOne" rollout has exerted pressure on results.  Earnings probably will decline modestly in 2014 due to the greater sales effort.  Even if new business is generated Zix's recurring revenue model will spread those payments out into the future.  Revenue is recorded as earned, month by month.  Success could lay the groundwork for superior growth in future years.  If the new line pans out and Google gets back in gear, sales could attain $75-$100 million in 2-3 years to provide fully taxed earnings of $.20-$.30 a share.  Our advice is to wait for a lower entry price or more clear cut proof that "ZixOne" will realize its potential.

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Vapor ( Nasdaq - VPCO ) -- Smokin' Hot or Up in Smoke ?

Vapor (VPCO $6.50) is a leading manufacturer of electric cigarettes.  The new smoking technology actually eliminates the carcinogenic smoke that causes cancer in conventional cigarettes.  Instead, the devices employ a battery and an electronic control system to vaporize liquid nicotine that's stored in a plastic cylinder.  The vapor is inhaled, delivering the nicotine along with some flavoring.  The amount of nicotine can be varied.   Electric cigarettes are sold both in disposable and reusable formats.  The latter is becoming more popular because it costs less, and consumers can fill their units with custom blends that are unique to them.  The technology is believed to be safer than conventional cigarettes due to the absence of tar and other cancer causing chemicals.  It also doesn't generate second hand smoke.  Opponents are trying to prevent e-cigarettes from gaining widespread adoption.  Some fear the new format will provide a gateway to regular tobacco use.  Others don't like the way they look.  The more serious want to slow down the market's growth until more scientific evidence becomes available.

Vapor was an industry pioneer.  It entered the business more than five years ago.  Manufacturing relationships were established in China, where the technology was invented.  Brand names were created.  Distribution channels were opened up.  A series of snafus impacted performance in 2011-12, though, just as the industry began to roll.  Several major tobacco companies entered the industry via acquisitions as the same time.  Those companies used their marketing muscle to capitalize on the industry's 100% annual growth rate, leaving the company behind.  At present Vapor's sales are approximately 10% of those generated by the industry leaders.

Vapor is attempting to mount a comeback in 2014.  Costs were brought back under control last year.  Operations were streamlined.  The products themselves were upgraded.  And a windfall distribution partnership was established with a Hollywood mogul (Ryan Kavanaugh) with big plans to make Vapor a success.  Kavanaugh is a self-made billionaire who has made a significant impact on the movie industry by focusing almost entirely on statistical and financial variables.  His productions consistently make money.  His company has developed a broad range of retail relationships to promote products that are connected with his movies.  The company also has connections with high profile celebrities, who might be recruited to promote Vapor's "Krave" brand on Twitter and other social media outlets.  Kavanaugh is committed to promote the company's products through a detailed contractual relationship.  It's thought he wants the effort to work as a matter of pride, as well.

Vapor has little chance of competing with the major cigarette companies without Kavanaugh's help.  But the fact of the matter is, he is on board.  (He's on the company's board of directors, in fact.)  Financial performance is likely to be unspectacular during the transition phase.  First quarter results probably will demonstrate little improvement on a sequential basis.  But sales and earnings could accelerate in the June period as new retail relationships go into effect.  Reinforcement on the social media front could provide additional impetus.  Overall industry sales are continuing to expand at a 100% rate, moreover.  Those gains actually could pick up speed as a result of recent publicity surrounding e-cigarette technology.

(http://en.wikipedia.org/wiki/Ryan_Kavanaugh) 

F.D.A. regulations could hamstring performance over the long haul.  A recent proposal contained little in the way of bite.  But the smoking vigilantes are likely to push for more stringent controls as time goes on.  State and local taxes could be applied, as well.  The technology currently costs more than tobacco cigarettes to produce but it enjoys a retail price advantage due to the absence of excise taxes.  If those are implemented demand could suffer.  Another long term factor is the possibility that e-cigarettes might veer in a completely non-corporate direction.  At this time a majority of e-cigarette revenue is produced by selling disposable units in conventional "packs" at conventional retail locations.  There has been a surge in small "vape" shops over the past year, though.  Customers go there and buy custom blends designed especially for them, which are used in reusable units.

Vapor is small enough that it might be able to take advantage of a development like that.  We think there is a good chance the industry could take on an anti-Big Tobacco flavor.  That sort of thing could happen in the marijuana industry, too, if that's ever legalized.  Imagine the head shops knocking off the Marlboro Man.

These shares trade at a high valuation.  Vapor competes with more established companies that already have greater market shares.  The government is on its tail.  And the industry remains in an early stage of development.  Things could go in any number of directions, with or without the company.  Our advice is to avoid the stock until a lower starting price emerges or the picture comes into better focus.  It's an interesting story, though.  Vapor deserves keeping an eye on.

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Issuer Direct ( NYSE - ISDR ) -- Automates S.E.C. Compliance

Issuer Direct (ISDR $11.50) is a leading provider of disclosure management solutions used by publicly traded corporations to comply with S.E.C. regulations.  The company also provides a wide range of investor communication products and services.  Most of those were obtained in a recent acquisition ("PrecisionIR").  Those include investor outreach, webcasting, annual report distribution, and hotline services.  Demand is expanding as companies broaden their compliance and communication activities.  Issuer Direct is gaining market share, moreover, by bundling its recently acquired services together with its legacy products to provide customers greater convenience and better pricing.  The company has been developing a series of software products that it licenses to end users, moreover.  That segment is building momentum and promises to yield a greater contribution in the coming year.

The PrecisionIR acquisition more than doubled the revenue base.  PrecisionIR had been a leading investor relations company, but under private equity ownership it hadn't reinvested in new technology since the mid 2000's.  Issuer Direct bought the company last year and now is rebuilding those platforms.  The overall customer base more than doubled with the transaction.  Existing customers on both sides now are being cross sold the entire product line.  New customers are being added at a modest pace, as well.  Financial performance has accelerated as a result of the combined marketing effort.  Further gains are likely in subsequent years as products are enhanced and new offerings are introduced.

Margins already have widened to superior levels.  That trend could have farther to go as software becomes a larger part of the line-up.  Next generation offerings are likely to include more social media integration so that press releases and S.E.C. filings can be distributed more broadly.  Those products also may include interactive features and analytics that allow issuing companies to see immediately how its investor base is reacting.  Facebook and Twitter integration may help companies shape those responses.

Longer term, the addition of a more dynamic news release operation could help Issuer Direct attract privately held companies.  There are approximately 9,000 publicly traded U.S. companies.  The number of private companies that could be realistic targets for Issuer Direct's services might exceed that by a wide margin.

Meantime, revenue growth of 20% or more appears sustainable.  We estimate 2014 sales will advance 81% to $16 million, bolstered by the PrecisionIR acquisition.  Earnings could rise 33% to $.85 a share.  Official numbers will be lower due to recurring non cash (warrant) expenses associated with the acquisition.  Margins are likely to decline in the current year by comparison because the acquired operations are less profitable than Issuer Direct's legacy products.  Greater average shares (+19%) will be outstanding, too.  Organic growth is expected to be in the 15%-25% range, depending how the cross selling works.  Initial results have exceeded the company's expectation.

In 2-3 years sales could reach $23-$25 million to produce earnings of $1.25-$1.35 a share.  That assumes no margin expansion from our 2014 estimate.  Marketing and product development costs could offset the anticipated improvement in gross margins.  If they don't, income could expand more rapidly.  Applying a P/E multiple of 20x to the low end of the range suggests a target price of $25 a share, potential appreciation of 115% from the stock's current level.  Acquisitions of complementary products and services, penetration of the private company market, or better than predicted margin expansion could support a higher valuation.

Near term, the stock may mark time until a major shareholder unwinds its position.  Hedge fund Red Oak Partners helped to finance the PrecisionIR acquisition in August 2013 by purchasing a convertible note from the company that is exchangeable into 626,566 shares.  Until that overhang is resolved the share price may have a hard time advancing.

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Xplore Technologies ( Nasdaq - XPLR ) -- Gets Tough

Xplore Technologies (XPLR $6.00) is a leading provider of rugged tablet computers used in industrial, commercial, and military applications.  The company's systems are used in challenging environments that conventional tablets are unable to withstand.  Many customers employ them in less hostile conditions.  Rugged units are less likely to break down.  Xplore got its start in the high end of the market.  The company recently expanded its product line with less expensive units, as well.  The first of its next generation systems was introduced in the December quarter.  That was an Android machine.  A new low cost Windows system is slated for introduction this month.  Demand for Xplore's high end (Windows) systems remains robust, providing a sound foundation for the company to build on.  As the new systems gain adoption results promise to accelerate.

Financial performance was impacted by two external events over the last year.  Xplore had a major supply agreement with ATT that was starting to take off when the telecom failed in its attempt to acquire T-Mobile.  A $4.0 billion break-up fee caused it to postpone a number of capital investments, including its deal with Xplore.  That relationship is expected to resume in late 2014.  Xplore also had cultivated a third party distribution arrangement with Dell Computer.  The computer maker planned to purchase rugged tablets and sell them under its own name.  That relationship was squelched when Dell went private.  Despite the setbacks Xplore continued to spend aggressively on product development and marketing.  A substantial contract for its Android system was signed with a different telecom provider.  Penetration of the military market gained momentum with the company's high end technology.  And more than a dozen high potential trials were initiated for its Android line, spanning several industries.  Xplore additionally expanded third party sales relationships both in North America (vertical markets) and internationally.

Introduction of the low cost Windows system could drive sales substantially higher.  Most companies still rely on Windows to run their information technology systems.  A minority are willing to integrate Android units with their central Windows operation.  Those are customers Xplore currently is conducting field trials with.  But most organizations prefer a full Windows coordination.  Xplore's upcoming low cost Windows tablet is slated for release this month.  Volume production will be achieved by the summer.  Prospective customers likely will test the machines in field trials that could last 3-12 months.  A decent off the shelf business could materialize right away.  As the core high end business is leveraged by the two new lines financial results could surge over the next 2-3 years.

We estimate income will rise 400% next fiscal year to $.25 a share on sales of $45 million (+29%).  A stronger showing is possible.  Organic growth could improve in subsequent years.  Margins promise to expand, also, as volume builds.  A third party relationship similar to the Dell plan could emerge, providing further ammunition.  Hewlett Packard represents a likely target.  In 2-3 years sales could achieve $80-$100 million to yield fully taxed earnings of $.75-$1.05 a share.  The high end of the range assumes the sale of 2.0 million additional shares to finance growth.  Applying a P/E multiple of 20x to the midpoint suggests a target price of $18 a share, potential appreciation of 200% from the current quote.

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Simulations Plus ( Nasdaq - SLP ) -- Automating Drug Discovery

Simulations Plus (SLP $6.25) is a leading provider of  software used by pharmaceutical companies to improve their drug development efforts.  Approximately 150 companies employ the technology, mainly in the United States and Europe.  Many of those are large organizations that purchase  licenses for multiple sites.  Simulations Plus enjoys a 95% or better renewal rate.  Most contracts are for one year.  Some customers make 2-year commitments.  There are no perpetual sales.  All of the company's revenue is recurring.  Most customers that don't renew either merge or reorganize in some other fashion.  The actual scientists who used the technology normally submit new purchase orders once they resurface at a new location.  Simulations Plus holds a significant lead over its direct competition, due to greater functionality and broader scope.  The potential market is believed to be less than 10% penetrated, mainly due to in-house alternatives.  As the technology keeps improving internal efforts are becoming less compelling.  Simulations Plus helps reduce costs and speed development time by identifying the most promising molecules with software rather than trial and error experimentation.  Like every medical research application the company's technology still has a long way to go before it's perfected.  But an intermediate term inflection point appears to have been reached.  Financial performance has started to accelerate.  That trend could gain momentum over the next several years.

Sales to China and other Far East nations are advancing.  In the past Simulations Plus had a difficult time with those markets because scientist salaries were low, allowing Asian drug companies to attack problems with brute force.  The combination of rising labor costs and better software solutions has helped the company make inroads, especially in China.  Further gains are likely as the pharmaceutical market expands and competitive pressure drives faster development schedules.  Greater use of generics in the U.S. and Europe is boosting demand, as well.  Besides making direct copies many new companies are developing combinations of existing drugs.  Software analysis is helping them avoid molecules that have unexpected problems.  Simulations Plus still emphasizes chemical entities.  But the company is picking up traction among biotechnology developers, too.

A 5-year contract with the F.D.A. could facilitate wider adoption.  Simulations Plus is working with the agency to test toxicity in a wide range of consumer and other applications.  That's beginning to open up new commercial opportunities.  Perhaps more important, though, as the F.D.A. becomes more familiar with the technology it may start to accept software generated data in the place of laboratory work in new drug applications.  Drug developers might start working with the technology before any such rules are implemented, moreover, to be in position  to move when the time comes.

Demonstration projects performed by the company have become strong selling points.  Last year Simulations Plus used its own technology, people, and money to identify a promising malaria vaccine.  Seven molecules were produced by a bunch of programmers, not scientists.  They all were synthesized by outside laboratories, and were active against the malaria target.  The company recently completed a second project, this time aiming at Cox-2 inhibitors.  Those drugs were removed from the market (except Celebrex) by the F.D.A. due to heart related side effects.  The company's project was aimed at keeping the positive effects (pain reduction) while eliminating the heart threat.  The results suggested a very promising profile.  The company doesn't plan to develop the drugs any further.  It only wanted to show how productive its software can be at zeroing in on a molecular format.  If a commercial lab had generated the results and was aiming to develop a superior Cox-2 product, its scientists now would fine-tune the molecules to come up with an ideal candidate.

We estimate sales will rise 14% in fiscal 2014 (August) to $11.5 million.  Earnings are on track to improve 17% to $.21 a share.  Faster gains are possible in subsequent years.  Consulting work is likely to expand in response to the demonstration projects.  Customers probably will hire the company to perform preliminary screens more efficiently than they are able to in-house.  Software license sales promise to advance rapidly, as well.  Emerging market business should keep expanding.  New products could yield further impetus.  Acquisitions of related technologies could be leveraged by the company's software platform and distribution network.  In 2-3 years sales could reach $14-$18 million to provide earnings of $.25-$.35 a share.

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Profire Energy ( Nasdaq - PFIE ) -- Burns Rubber

Profire Energy (PFIE $3.50) is the leading provider of automated burner management systems used by oil and gas producers to remove contaminants after the energy is pulled up from the ground.  The products are used, to a lesser extent, in downstream operations to clean up oil and gas while in transit.  Most U.S. wells employ manual systems that require workers to relight a unit if the flame is extinguished.  Profire's machines monitor the burners with computers.  That allows operators to adjust the flame density automatically as the amount of oil and gas increases or diminishes.  The systems also relight the units if they go out.  Canadian regulations require automated units like Profire's to improve worker safety.  Similar rules have not been implemented in the U.S. to date.  Dozens of American workers continue to be blown up every year using the old technology.  A growing contingent of U.S. producers are adopting Profire's automated approach not only to enhance safety, but to improve efficiency and generate environmental benefits, too.

Profire originally was a service company that focused on burners and other oilfield equipment.  The company saw the opportunity to automate the process and developed its own technology in the late 2000s.  Sales initially addressed the Canadian market due to the regulatory tailwind there.  Initial success led to expansion in the United States.  The transition to becoming a manufacturing company wasn't seamless.  Financial performance was inconsistent prior to the current fiscal year (March).  But Profire emphasized product development and customer service despite the ups and downs, enabling it to become the industry leader by a wide margin.  Less than 5% of the potential market has been penetrated to date.  That market is continuing to expand at above average rates as North America becomes the #1 energy producing region in the world.  And Profire is ensconced as the industry leader.  The company holds 65%-70% of the market today, and that figure is continuing to rise.

Growth has accelerated in response to expanding U.S. adoption.  Sales are on track to more than double to $35 million in the fiscal year ended March.  Margins have recovered from last year's decline, supporting a likely 400% expansion in profits to $.15 a share.  Regulatory uncertainty caused a hiatus in Canadian sales for a large part of last year.  Profire also misplayed its sales force expansion in the United States.  The U.S. situation was resolved by the time the current fiscal year began.  That paved the way for the explosion in sales.  The Canadian business has bounced back but remains less vibrant than it might be.  Regulations exist but have been enforced inconsistently, encouraging some drillers to employ alternative (non-automated) solutions.  The lack of pipeline capacity has impacted production in Western Canada, as well.

Geographic expansion promises to sustain growth at superior levels.  Profire covers a small portion of the U.S. market presently.  New offices are being opened at a fast clip in North Dakota, Texas, Oklahoma, and Pennsylvania to provide deeper hands on coverage.  The sales force has doubled over the past six months.  That group promises to make significant contributions in the June period and become fully operational in Q2-Q3.  Relationships with OEMs are being expanded.  About of 25% of sales are made to makers of complete systems that are installed at the well site.  Most of the rest go to installation companies that buy parts from multiple manufacturers and assemble them.  About 25% of sales are retrofits to existing systems.  International sales remain low but distribution channels have been established in Brazil and Australia.  Efforts recently were initiated to enter the Middle East and other high potential international markets.

New products will be introduced on a regular basis.  Profire is upgrading its systems with the latest semiconductor technology to facilitate remote software updates and other performance enhancements.  The line is being extended to more upstream applications, as well.  Several large non-energy industries employ old fashioned burners, moreover.  Profire believes its next generation systems could penetrate those markets, probably in conjunction with resellers that already have the necessary marketing relationships.  Ancillary products are being developed, too.  Approximately 30% of sales are comprised of third party items like valves and regulators.  Margins are good on those sales.  But they will be even better once Profire starts manufacturing them in-house.

Prices may increase in the upcoming fiscal year.  Current units sell for $2,000-$3,000 apiece, depending on the number of features included.  The average well produces $50,000-$100,000 a day in revenue.  Manual re-light systems can go dark for days at a time until a worker swings by and starts up the unit again.  That normally entails putting a lighted rag on the end of a stick, and inserting it into the burner.  Profire's computer based machines are more economical even when the flames don't go out.  Older units keep the flame steady at a high level no matter how much oil or gas is flowing.  The company's automatically adjust, saving energy.  The units also sharply reduce the amount of natural gas that is flared into the atmosphere, cutting greenhouse gas emissions.  Many of the 35,000 new wells drilled each year in the U.S. now use an automated system.  But about 850,000 older wells are still out there with manual systems.

Acquisitions could enhance performance.  Our estimates reflect Profire's organic potential.  But the company is investigating several deals, both in the burner management space and among other types of products that could be sold to the same customer base.  Any transactions within the industry would be made to acquire distribution capabilities.  Profire probably would sunset any acquired systems and transition the new sales force to its existing line-up.

The U.S. retrofit market could surge if safety regulations are implemented.  The industry is moving in that direction due to the high benefits and low costs associated with Profire's units.  But that transition is mainly focused on new wells currently.  If tighter rules are created the company probably would be the largest beneficiary.  That level of adoption also might facilitate international growth.

We estimate sales will improve 40%-55% next fiscal year to $50-$55 million.  Acquisitions could yield upside from there.  Earnings have the potential to reach $.20-$.25 a share.  In 2-3 years sales could achieve $100-$125 million, delivering income of $.45-$.55 a share.  Growth could remain at a high level in subsequent years as North American energy production continues to grow, the retrofit market develops, and international demand becomes a more important element.  Applying a P/E multiple of 20x to the midpoint of the range suggests a target price of $10 a share, potential appreciation of 185% from the current quote.

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