PSB Monthly Issue August 2009
August 2009
OFFERS OPPORTUNITY TO TRIPLE YOUR MONEY
This penny stock combines two of our favorite investment themes – China and Biotechnology.
You guessed it.
We’ve found an amazing Chinese biotech stock on the verge of a major breakout. (More on that later on…)
First, some background about the industry.
China’s biotech sector is made up of several different industries. The industry we’re focusing on is plasma-based biopharmaceuticals.
Firms in this highly-specialized industry produce essential medicines from healthy human blood plasma.
Plasma makes up about 55% of human blood. It’s a yellow liquid in which red blood cells, white blood cells, and platelets are suspended.
Plasma also contains numerous important proteins.
The most abundant protein is albumin.
Albumin serves many purposes. It helps keep blood from leaking out of blood vessels. It carries medicines and other substances through the blood. And, it’s essential for tissue growth and healing.
Another important group of proteins is the immunoglobulins.
These proteins are critical to the body’s immune system. Immunoglobulins are made up of tens of thousands of antibody molecules. And, each antibody is designed to neutralize or destroy a specific bacteria or virus.
The medicines made from these proteins are indispensable for treating trauma patients and a number of specific diseases.
The Chinese government, without even knowing it, has created a very favorable business environment for plasma-based biopharmaceutical firms.
Strict government regulation of the plasma collection process has led to a huge shortage of plasma. Low supplies of plasma combined with a ban on imports have in turn created a critical shortage of plasma-based medicines.
This supply shortage is a boon for plasma-based biopharmaceutical firms.
Prices for many of their products are rocketing into the stratosphere. Last year, these firms saw prices double, triple, and even quadruple in some cases. As a result, revenue and earnings are soaring.
One plasma-based biopharmaceutical firm is already emerging as the industry leader.
This company owns more plasma collection stations than any other single private competitor. And, it’s pursuing an aggressive acquisition strategy to further increase its dominant position in the market.
Introducing, China Biologic Products (CBPO).
Name: China Biologic Products Ticker Symbol: CBPO Market Cap: $79 Million Recent Price: $3.70 PSB Rating System 4.9 Stars Raging Revenue: (5.0 stars) Revenue has been growing 53% a year over the past four years. Management projects revenue of $90 to $100 million this year. That’s phenomenal growth of 92% to 114%. Beautiful Books: (5.0 stars) Earnings have been growing 86% a year over the past four years. Management forecasts earnings growth of 50% to 82% this year. The company’s balance sheet is strong with $34 million in cash. Stellar Structure: (4.5 stars) Insider ownership of 60% shows management is very confident in the company’s future. Institutional ownership is a solid 20% with plenty of room to grow. Valuation Verification: (4.8 stars) The stock is greatly mispriced by the market. Based on our valuation analysis we think the stock is worth at least $13 a share. That’s upside potential of 251% or more. Meaningful Milestones: (5.0 stars) Through recent acquisitions, CBPO has become the largest non-state-owned plasma-based biopharmaceutical firm in China. |
THE PLASMA-BASED PHARMACEUTICAL BUSINESS
CBPO is the largest non-state-owned plasma-based pharmaceutical company in China. They handle everything from research and development to plasma collection to drug production and commercial distribution.
Here’s a quick overview of their production process.
The company collects plasma through its many donation stations around the country. The plasma is sent to their manufacturing facility where beneficial proteins are separated out and purified. These proteins are then used to manufacture the company’s plasma-based medicines.
CPBO currently makes 19 different products in 7 major categories.
Human Albumin accounts for about 58% of sales. It’s used to treat shock, burns, liver failure, and pancreatitis. It’s also critical for patients undergoing heart surgery.
Immunoglobulin products make up another 40%. They’re used to treat or prevent specific diseases, including hepatitis, measles, rabies, tetanus, and kidney diseases.
Key to CBPO’s success is their steady supply of plasma.
They currently own 16 of the 100 plasma collection stations in China. The stations are strategically located to cover the North, South, and West parts of the country. They produce about 580 of the 4,000 tons of plasma collected in China each year.
With their initial plasma supplies secured, CBPO is now focusing on aggressively growing their business.
One part of this strategy is acquiring other companies in the industry. This serves two important purposes. First, they obtain additional collection stations which boost their annual supplies of plasma. Second, they gain manufacturing facilities which expand production capacity.
The other part of the strategy is developing more advanced plasma-based products. By expanding their product offerings, the company can grow organically. And, more advanced products have higher margins that will boost profitability.
Speaking of profits, let’s take a peek at the company’s financial condition.
THE NUMBERS
CBPO is growing at a breakneck pace.
Just look at the past four years. Revenue more than quadrupled. And, earnings mushroomed more than twelve-fold. That’s astounding annual growth of 53% and 110% respectively.
Last year wasn’t too shabby either.
Revenue jumped 44% to $47 million. And, net income spiked 50% to over $15 million or $0.56 per share.
Driving growth were strong sales of human albumin and immunoglobulin products. Huge price increases of 29% to 227% across the product line also gave an added boost.
Amazingly, growth is accelerating in 2009.
Two recent acquisitions and a general price increase supercharged last quarter’s numbers. Revenue rocketed 169% higher to a record $21 million. Net income rocketed 88% higher to $4.3 million. And, earnings per share doubled to $0.20.
The outlook for the rest of the year is outstanding.
If you can believe it, the government recently strengthened regulation of human plasma. Tight supplies of plasma-based products are shrinking faster than ever. And, already inflated prices are jumping even higher.
As a result, management is projecting terrific growth for full year 2009.
They expect revenue to be between $90 and $100 million, a whopping 90% to 114% higher than last year.
And, they predict net income to be between $18 and $22 million. That’s about $0.84 to $1.02 per share. An amazing 50% to 82% leap from 2008.
As you can see, CBPO’s revenue and earnings are growing out of this world. But, what about their balance sheet?
No worries there.
The company’s sitting on a cash hoard of $34 million. Current assets are sufficient to cover current liabilities. And, long term debt of $9 million is of no concern given the $39 million in shareholder equity.
INVESTMENT RISKS
Of course, an investment in CBPO is not without risks.
A key risk for the company is a secure supply of plasma for its products. Any disruption in supply of this crucial raw material would have a negative impact on sales and earnings.
Another risk is government regulation of the retail prices the company charges for its main products. CBPO cannot raise prices above the set price ceilings without government approval.
A third risk is fluctuations in currency exchange rates between the Chinese Remnibi and the U.S. Dollar. These fluctuations can negatively affect the company’s financial results which are reported in U.S. Dollars.
POTENTIAL RETURNS OF 251% OR MORE
Right now’s the perfect time to climb aboard the CBPO express.
The short supply of plasma and plasma-based products is pushing product prices higher and higher. This supply and demand dynamic isn’t going to change anytime soon. Higher prices will be the norm for some time to come.
CBPO is perfectly positioned to take advantage of this favorable pricing environment.
Their aggressive acquisition strategy is boosting their plasma supply and expanding production capacity. By selling more products at higher prices, the company should see strong revenue and earnings growth.
The company is also well positioned to grow long-term.
Research and development is building a strong pipeline of new medicines. These advanced plasma-based products should carry higher profit margins. Higher margins of course give an added boost to profitability.
And finally, the stock is completely mispriced by the market.
Based on trailing twelve month’s earnings per share of $0.66, the stock’s P/E ratio is a measly 5.6x. The average P/E ratio for the biotechnology industry is 17.3x.
Using the industry average P/E and trailing earnings of $0.66, CBPO is worth $11.42. That’s 209% higher than its recent price.
If we apply the industry P/E to the low 2009 earnings estimate of $0.84, we get a price of $14.53. A huge 293% higher than its recent price.
Based on our analysis, the stock’s worth at least $13 a share. Buy CBPO now for potential gains of 251% or more.
ACTION RECOMMENDATION
BUY China Biologics Products (CBPO) up to $4.26 per share.
Recent price is $3.70.
Use a stop-loss of $1.85 on this position.
Don’t forget your position sizing and stop-loss rules.
REVOLUTIONIZING THE LOTTERY INDUSTRY
I have an important routine that I follow every morning. On my way into work, I stop at a nearby convenience store for a cup of coffee.
I can’t start my day without a steaming hot cup of java.
The store’s always bustling with activity. Others just like me are picking up something to get their day going. A cup of coffee. A soda. An energy drink.
Here’s the interesting thing.
I always seem to get in line behind someone with a fist full of scratch card lottery tickets. Every morning I wait while a “scratcher” turns in his tickets and buys new ones with his winnings.
You know what I’m talking about.
The small cardboard tickets with little prize pictures covered by that silvery stuff you scratch off with a coin. If you reveal the required number of prizes, you instantly win that prize.
Scratch cards are a very popular form of gambling.
Many people are drawn by the low cost and the opportunity to win instantly. Apparently, these games are so addictive they’re often referred to as, “Cardboard Crack!”
I don’t play them myself except on rare occasions. Once in a while, I’ll pick up a few tickets and let my daughters scratch them off. They get a big kick out of it. (Of course, we’ve never won more than a few bucks.)
Like most things these days, the simple scratch card lottery ticket is entering the digital age. One company has developed a digital version of the cardboard scratch card. It’s called the Electronic GameCard.
The GameCard is the size of a credit card and weighs just half an ounce. It has an LCD window, touch pad controls, a microchip, memory board, and long-life battery. It uses a random number generator and other patent protected technology to run its games.
A typical GameCard costs about $20 and offers 80 plays. That’s just a quarter a play. Much less than the $1 or $2 for a single scratch card game.
Instead of scratching with a coin, the player presses a touchpad. A built-in LCD displays prize pictures or numbers. Each spin results in a combination of numbers or pictures that can earn the player points. When all the plays are exhausted, the player checks his point total to see if he’s a winner.
The GameCard can be programmed to offer any number of plays over any time period. The promoter decides the number of prize-levels, the prize structure and number of winners at each level. Winning numbers or symbols can be checked wherever and however the promoter chooses.
The GameCard also provides state of the art security features.
Each device contains sophisticated, multi-layered tamper-proof construction. It’s secure enough for use by US State Lotteries, casinos, and bingo halls.
Each GameCard is fully brandable and serves as a great promotional tool. The promoter chooses the cover design and color scheme. The external graphics can be adapted to the promoter’s specific market, areas, and language.
This amazing device could someday replace cardboard scratch card tickets. A worldwide market of some $58 billion. And, this isn’t just my humble opinion. Leaders in the lottery industry are calling the GameCard the next digital evolution of the scratch card.
The GameCard recently made its public debut.
Both the Iowa and Kansas State Lotteries are offering the GameCard in their states. And, it’s a huge success. The GameCard is outselling traditional $10 one play scratch cards 2 to 1.
This has caused an industry heavyweight to take notice.
Scientific Games, the largest supplier of scratch card tickets in the world, is very impressed with GameCard. So impressed, they purchased a 10% interest in the company that makes GameCards. (There’s no bigger endorsement for your product than a direct investment by the industry leader.)
So, who is this amazing little company that’s single-handedly changing the scratch card lottery business? It’s none other than Electronic Game Card (EGMI).
Name: Electronic Game Card Ticker Symbol: EGMI Market Cap: $98 Million Recent Price: $1.65 PSB Rating System 4.9 Stars Raging Revenue: (5.0 stars) Revenue has exploded ten-fold over the past three years. Management projects revenue to top $17 million this year. That’s phenomenal 60% year over year growth. Beautiful Books: (5.0 stars) EGMI has posted a profit in eight straight quarters. Management forecasts earnings growth of 40% this year to $0.14 per share. The company’s balance sheet is strong with $5.4 million in cash. Stellar Structure: (4.5 stars) Insider ownership is very strong at 35%. Institutional ownership is just 1%. Look for the stock to soar as more institutions buy this amazing stock. Valuation Verification: (5.0 stars) The stock is significantly misvalued by the market. Based on our analysis we think the stock should hit $5 a share in the next year. That’s upside potential of 203% or more. Meaningful Milestones: (5.0 stars) The company recently launched new products in two huge new markets. New Chairman of the Board, Lord Steinberg, brings a wealth of experience, knowledge and contacts in the gaming industry. |
THE ELECTRONIC GAME CARD BUSINESS
EGMI is the designer and manufacturer of the Electronic GameCard. It was originally conceived for the global sales promotion and lottery industries. But, it’s now been expanded into the lucrative Native American gaming and Educational markets.
The company’s total addressable market is a mind-boggling $100 billion. So far, EGMI is just scratching the surface (sorry, I couldn’t resist the pun). But, they’re making big strides in the right direction.
Over the past year and a half, EGMI has matured into a solid, profitable, fast growing microcap. They brought in a new Chairman of the Board. They launched products into new markets. And, they’ve strung together eight straight profitable quarters.
It all started with the naming of Lord Leonard Steinberg as Chairman of the Board.
Lord Steinberg is one of Britain’s most successful businessmen, and one of the most well known personalities in the gaming industry. Fifty years ago he founded betting operation Stanley Leisure. It later became the largest casino operator and fourth largest betting operation in the United Kingdom.
A few years ago, Lord Steinberg sold both operations for more than $2 billion. During his tenure, Stanley Leisure provided shareholders with 25% annual returns.
He’s now prepared to do the same thing with EGMI.
There’s no questioning his commitment to the company. Before he became Chairman, he bought more than 5% of outstanding EGMI shares in the open market. He also had this to say:
Electronic Game Card is an innovative product that addresses an extremely large potential market. I am a strong believer in this technology… I believe this company has extremely exciting prospects and I look forward to taking the company and the product range to the next level.
Lord Steinberg brings tremendous experience and vision to EGMI. He’ll be a huge asset as the company expands internationally and grabs a bigger share of existing markets.
The company’s sales strategy is to partner with distributors in different geographic markets. This outsourcing model provides immediate market exposure with minimal expense. Now, let’s take a look at a couple of recent deals.
Early last year, EGMI signed its first deal with a Native American tribe.
The Shinnecock Indian Nation placed an initial order for 25,000 GameCards. This marked the company’s long awaited entry into this highly lucrative market.
Since then, EGMI has made further inroads into the Tribal casino market.
The company signed a five year distribution deal with Sovereign Game Cards last fall. Sovereign has long established relationships with more than 25 tribes throughout North America.
This is a solid, high margin deal that’s already contributing to EGMI’s 2009 results.
Under the agreement, Sovereign will sell GameCards into the multi-billion dollar Native American casino market. EGMI stands to receive at least $10.25 million in royalties over the five year term. But, these could ultimately be much larger.
EGMI also recently made big splash in the Education market.
In June, the company signed a deal with sales and marketing firm FMM-The Moscoe Group. They represent some of the largest and most well known retailers in the world.
FMM will market EGMI’s Interactive Entertainment and Education “Know-it-all-Quiz Cards” and “iQuizCards”. The six leading retailers included in this arrangement are all household names with a total of 19,000 retail store locations.
This is a great opportunity for EGMI to gain immediate access to big brand distribution of its products. The company expects this to be the first of many new product lines launched in this manner.
As you can see, big things are happening at EGMI. Now, let’s see how these events are impacting their financial results.
THE NUMBERS
EGMI is growing by leaps and bounds.
Over the past three years, revenue has exploded more than ten-fold to over $10 million. And, after turning the corner on profitability in 2007, the company’s shown a profit in each of the last eight quarters.
2008 was a banner year for EGMI.
Revenue jumped 76% to $10.6 million. It would have been significantly higher but for a 25% drop in the British Pound versus the U.S. Dollar. About 80% of the company’s revenue is generated in the U.K.
Net income rocketed 81% higher to $6.3 million or $0.10 per diluted share.
This amazing growth is continuing so far in 2009.
Just look at the first quarter’s numbers. Revenue popped 29% to $3 million. Again, a weak British Pound was a drag on revenue. Net income rose 30% to $1.7 million or $0.03 per share.
The outlook for the full year 2009 is fantastic.
Management expects revenue to top $17 million and earnings per diluted share to hit $0.14. That’s annual growth of 60% and 40% respectively.
EGMI’s balance sheet continues to get stronger and stronger.
The company’s sitting on net cash of $5.4 million. Current assets cover current liabilities by a strong 10 to 1. And, excess cash will be used to increase shareholder equity by buying back up to 5% of outstanding shares.
Now, let’s consider a few risk factors.
INVESTMENT RISKS
Every investment involves some risk, and EGMI is no exception.
A key risk is fluctuations in currency exchange rates between the U.S. Dollar and the British Pound. With 80% of revenue coming from the U.K., a strong U.S. Dollar can have a substantial negative impact on EGMI’s financial results.
Another risk is the company’s lack of an established sales and marketing operation. If third parties contracted to handle this function are not successful, EGMI’s results could suffer.
A third risk is acceptance of the company’s products in the marketplace. The company’s long-term growth depends on acceptance of its products across all markets.
POTENTIAL RETURNS OF 251% OR MORE
EGMI presents a terrific growth opportunity.
The company has no direct competitors in any of its markets. And, their patented technology creates a substantial barrier to entry for any would-be competitors.
EGMI’s products are rapidly gaining acceptance in both the lottery and Native American gaming markets. And, the company’s entry into the Educational market this year is just the beginning of what could be a huge growth driver.
The company’s management team is second to none.
They have experience building billion dollar companies. They have important contacts in the gaming industry. And, their knowledge of international markets will help further EGMI’s expansion overseas.
Finally, the stock offers amazing growth potential at a very reasonable price.
The company is expected to grow earnings at 30% a year over the next five years. But, at its recent price, the stock is trading at a PEG ratio of just 0.38. That’s a 62% discount to its growth rate.
At a PEG ratio of 1.0, the stock’s worth at least $3.00. And, if we base it on forecasted earnings of $0.14 per share, the stock’s worth $4.20.
Based on our analysis, we think EGMI will reach at least $5.00 a share in the next year. Buy EGMI now for potential gains of 203% or more.
ACTION RECOMMENDATION
BUY Electronic Game Card (EGMI) up to $2.06 per share.
Recent price is $1.65.
Use a stop-loss of $0.83 on this position.
Don’t forget your position sizing and stop-loss rules.
Category: PSB Monthly Issues
