May 30, 2007

CryptoLogic: Undervalued?

From the Fool:

Cryptologic is a provider of software and services for the online gaming (read: gambling) market. See the problem yet?

In its year-end filing, the company gives a three-year history that starts off by saying, "The global online gaming industry including the United States grew from $5.7 billion in 2003 to $10.7 billion in revenue in 2005." It then quickly continues on to the juicy part, where the U.S. government issues the Unlawful Internet Gambling Enforcement Act (UIGEA), which pretty much says that online gambling in the U.S. is illegal.

The UIGEA was approved in September 2006, and now, eight months later, Cryptologic is still very much alive and kicking -- though maybe not quite to investors' satisfaction. As of the most recent quarter, the company's revenue was down 27% year over year, and though it stayed profitable, it did so at a much lower margin. Possibly more concerning is the fact that the company, which historically has produced a lot of cash, burned through $11.1 million in operations for the quarter.

The issues facing the company make me think of something Berkshire Hathaway head honcho Warren Buffett said earlier this month at the Berkshire annual meeting. When asked for his take on whether gambling would continue to be a good business, Buffett replied that as long as it stays legal, it will continue to be a very good business. He also added that as it becomes easier for people to gamble, there will likely be even more gambling going on.

So the question might be: Is anybody making it easier for people to gamble than Internet gaming companies?

Not having full legal access to the gambling-hungry U.S. population is a huge concession, but Americans aren't by any stretch the only group that enjoys gaming. Even before the UIGEA legislation, the majority of Cryptologic's revenue came from non-U.S. sources. While CAPS players are not all fans of gambling, many of them do see opportunity to pick up undervalued shares of Cryptologic.

CAPS All-Star bmw201030 said, "Since recent US legislation, the stock has been a drag. Mr. Market is once again over reacting. Most of this company's revenues come from overseas not from the US. While the impact is small the stock price drop was too much."

Crazykling, another CAPS All-Star, adds: "I like the short term prospects for a more appropriate price, I like the long term growth potential for online gambling, I like the non-US dollar revenue to hedge inevitable decline of [the dollar], I like the fact it's Toronto/Irish based and has government contracts which builds trust worthiness." Crazykling also cites the stock's relatively low P/E ratio, its relationship with Playboy, and the fact that Mohnish Pabrai holds a 12%-plus slug of the stock as reasons to give this beat-up stock a second look.

Investing in Fiber Laser Technology

From a commentary on Zacks.com:

IPG Photonics (IPGP) is the clear leader in the fiber laser market, controlling an estimated 70% share of the market.

Lasers are used for a wide variety of applications, ranging from medical incisions to printing to telecommunications transmission. Traditional lasers use a series of mirrors and lenses to produce a laser beam. By contrast, fiber lasers are constructed with fiber optic coils and cables. Currently, fiber lasers account for less than 10% of the total laser market.

Competitive Advantages

IPGP has significant cost and technology advantages over the competition. The company was the first to target the fiber laser market, and has developed a particularly strong expertise in making these high-power, difficult-to-produce lasers -- which are used for specialty functions like cutting and welding large metal pieces and parts for products like airplanes.

IPGP has a virtual monopoly on the high-power laser market. While it's possible other laser manufacturers could enter this space, it takes time to develop the required technical competencies and manufacturing processes. Building fiber lasers requires a different set of technical skills than traditional lasers, so existing competitors can't necessarily translate their competencies in traditional laser manufacture to the fiber market.

In addition, IPGP has built out significant manufacturing capacity for key parts of its fiber laser systems. That list includes amplifiers, fiber optic components, and semiconductor diodes for emitting light.

By building large-scale factories and streamlining operations, management has significantly reduced production costs. The company has also essentially eliminated the need to buy finished parts from outside suppliers. By controlling the manufacturing of both parts and finished laser systems, IPGP is vertically integrated, making it more difficult for competitors to penetrate the market.

Growth Drivers

The most obvious growth driver for IPGP is the replacement of traditional laser systems with fiber lasers. Since fiber lasers currently account for less than one-tenth of the global laser market, there's significant room to grow simply by taking share.

In that regard, growth will be driven by the superior performance of fiber laser technology. Specifically, fiber lasers offer a higher quality beam than traditional lasers -- a major advantage, particularly when it comes to precise cutting functions. Fiber lasers are also smaller, lighter and more portable than older-style systems.

In addition, fiber lasers are also less expensive to operate. Traditional lasers include mirrors and lenses that need periodic tuning to remain usable -- fiber lasers don't require many of these parts. Furthermore, fiber lasers tend to heat up less than traditional systems, causing less stress on internal parts. And finally, fiber lasers require less energy to run. All of these factors cut down on operating and maintenance costs.

Traditionally, fiber lasers were more expensive to produce, but the picture has changed in recent years. The prices of key components like fiber optic cable and diodes have plunged as manufacturing processes have been refined. Thus, manufacturing cost isn't really an issue with these lasers any longer, removing a major impediment to the growth of the industry.

IPGP has seen its revenues jump nearly seven-fold over the past five years. Given its already commanding lead in the fiber market, that growth is a sure sign that the company has begun taking share from traditional laser manufacturers.

May 24, 2007

Crown Crafts

From Seeking Alpha:

A week ago, one of my contrarian stock screens picked up a jewel, namely Crown Crafts (Nasdaq: CRWS), which, at $4, is ridiculously cheap by almost any fundamental measure. Crown Crafts is a manufacturer of quality infant and juvenile products, and owns or licenses many valuable brands, including Disney Baby, Sesame Street, Classic Pooh, Eddie Bauer Baby, and more. The company aggressively defends its reputation as a maker of quality products, and is thus able to convince many brand-holders to license their brands to Crown Crafts. Meanwhile, parents are willing to pay a premium for brand-name products for their babies.

CRWS once had a terrible capital structure, with lots of outstanding stock warrants. However, its solid cash flow allowed it to do a massive refinancing in the middle of 2006, which in one fell swoop eliminated all those stock warrants (thus abolishing the threat of massive stock dilution) and paid down debt, resulting in dramatic drop in interest payments. This caused the stock to jump from $0.65 to $2 in a couple of days. At the same time, the company shifted its manufacturing to Asia, and consolidated its distribution centers from two to one. Revenues dropped from $83 million in 2005 to $72 million in 2006, presumably because management was too preoccupied with the momentous restructuring in 2006, but operating income actually increased from $6 million to $7 million, a testament to the huge increase in operating efficiency and profit margin brought about by the restructuring.

In 2007, Crown Crafts has fully emerged from its restructuring as a much stronger company. The stock price has trended upwards from $2 in 2006 to $4 today. It has spun off its Churchill Weavers furniture business to focus on its core infant and juvenile product business, and has bought the Kimberly Grant brand of infant products to further strengthen its core business. In March 2007, Crown Crafts graduated from an OTC stock to a Nasdaq listing.

At this point in 2007, Crown Crafts is on track to achieve a net income of $7 million for 2007, and a free cash flow of $10 to $12 million. Assuming a conservative $6 million net income for 2007, with an EPS of $0.60, this implies a PE of 6.7. With a quality company in a safe steady industry, a discount rate of 10% is appropriate. With a 10% discount rate, a company experiencing zero growth should have a PE of 10, and a company experiencing a very modest 5% growth should have a PE of 14. In other words, CRWS should be worth at least $6 per share, and probably is worth around $10 per share.

Of course, no investment is completely safe. A batch of baby bibs produced by Crown Crafts was recently found to contain high levels of lead, although the lead was in an non-absorbable form and does not place babies at risk. Nonetheless, to defend its reputation, Crown Crafts initiated a voluntary recall of the product. Management believes that the recall will be limited in scale and will not materially affect the earnings in 2007. Nevertheless, this episode illustrates the danger of outsourcing production to Asian countries, a danger which management will have to consider and mitigate in the future. In addition, the company derives 35% of revenues from Walmart, 15% from Target, and 30% from Toys R. Us, and sales of the Disney Baby brand makes up 41% of its revenue.

The extraordinary concentration of customers and licensees means that the loss of one of these key relationships will materially affect results. Lastly, CRWS has attracted very little attention thus far, and trading volumes is only around $100k a day, which makes it difficult for large institutional buyers to acquire any meaningful amounts of stock.

May 23, 2007

ICAD

A quick write up on ICAD from the Fool. They digitize the science of radiology for the treatment of cancer.

Growth potential is incredible. Super product in great demand and is affordable. Advent of partnership with Fujifilm (Nasdaq: FUJI) gives them a huge sales force for free. This one could go to twenty if the stars are right.

May 22, 2007

An Emergent Opportunity

From the Fool:

Despite a very bullish rating from the Motley Fool CAPS community with 64 outperform ratings from a total of 67 players, the stock of vaccine developer Emergent BioSolutions (NYSE: EBS) is down more than 20% in the last month. The company made its Wall Street debut six months ago, selling 5 million shares to the public at $12.50 each.

Two weeks ago, Emergent reported solid revenue growth for its first quarter to a level of $26.4 million, from $12.2 million in the year-ago period. Results were driven by a 125% increase, to a total of 1.1 million doses of the anthrax vaccine BioThrax delivered to the government for both the strategic national stockpile (90% of total) and the immunization of military personnel (10% of total). The company also reported a narrower net loss of $2.7 million, down from $4.6 million in the year-ago period.

Other recent activities by the company include the receipt of fast-track designation by the FDA for BioThrax in post-exposure anthrax treatment, licensing of a compound to aid in the development of improved anthrax vaccines, filing an investigational new drug application for a phase 1 trial of an anthrax immune globulin treatment, and beginning a phase 2 trial of an experimental typhoid vaccine. Other vaccines in development include ones for hepatitis B, group B strep, meningitis B, and chlamydia.

Emergent has a market cap of just $310 million. I think that's an attractive value for the company, as it has guided for $150 million in revenue this year, which should be sufficient to make the company profitable. Emergent also has a strong balance sheet, with more than $67 million in cash and investments. Emergent's results will be driven in the near term by continued sales of the anthrax vaccine to the government, which are expected to remain strong. The company also has a promising pipeline of vaccine candidates for future development, which would diversify its portfolio.

Feverish Growth at Meridian Bioscience

An article from the Fool about Meridian Bioscience

Looking to add a small-cap health-care stock to your portfolio? You might want to carefully consider the recent performance and future prospects of diagnostic-test-kit maker Meridian Bioscience (NYSE: VIVO). Today, the company reported yet another record quarter of earnings and also announced a 3-for-2 stock split, while its stock price reached a new 52-week high.

Overall, the medical-diagnostics industry continues to sizzle. In January, Abbott Laboratories (NYSE: ABT) announced an agreement to divest its core laboratory diagnostics business to General Electric (NYSE: GE) for a hefty cash sum of $8.1 billion. And just earlier this month, shares of Becton Dickinson (NYSE: BDX) hit a new 52-week high, with shareholders anticipating the company's Q2 earnings release next week.

Meridian Bioscience isn't looking too bad, either. Diluted earnings per share for the second quarter grew by 22% on a 14% increase in net sales versus the year-ago quarter. The company also confirmed its full-year guidance of diluted EPS in a range of $0.83 to $0.87 and declared a regular quarterly cash dividend of $0.16 per share -- a 39% increase in the regular quarterly rate over the prior fiscal year.

What's driving this growth at Meridian? Is it sustainable? In terms of growth drivers, Q2 earnings were fueled by greater sales of the company's test kits for stomach ulcers and upper respiratory infections. Meridian's Life Science division also rebounded from a weak Q1 in which the segment's operating income amounted to only $19,000. That amount compares unfavorably with the $848,000 the segment generated in operating income in the most recent quarter.

Management continues to seek out potential acquisition opportunities and prides itself on new-product innovation. For instance, in February, the company received FDA clearance for its new E. coli infection test. The test, the first of its kind, can differentiate between toxin 1 and toxin 2 types of E. coli and will be highly useful to hospitals in light of recent national E. coli outbreaks in the United States. With these innovations in mind, I believe that the company can maintain a high degree of growth.

May 18, 2007

Panacos

Panacos if a MF Rule Breakers recommendation. They are trying to bring an HIV medicine to market.

May 16, 2007

Nuance Communications

This was included in a Fool Report; "Three Hidden Gems Ready to Run"

Nuance Communications [Nasdaq: NUAN] is the largest pure-play in voice and speech recognition software. Its main areas of concentration are its legacy imaging business (Visioneer, the precursor to ScanSoft, was spun off from Xerox), network speech, embedded speech, and dictation. It has a royalty/software/service model that matches one of the great growth stories of the 1990s, Qualcomm [Nasdaq: QCOM]. Its workhorse segment, dictation, is a $10 billion business in the U.S. health-care segment alone. Nuance predicts that its dictation segment will continue to grow rapidly, similar to the 70% revenue growth it experienced in the most recent quarter. And imaging, a slow growing but highly profitable business, will account for about $70 million (i.e., more than 20%) of an anticipated revenue range of $315 million to $325 million in 2006.

In 2008, more automobiles, handsets, and computers will carry voice-recognition technology. Large corporations are slowly starting to warm to the idea of adding a voice-recognition component to their customer service. To be sure, the technology saves companies a lot of money. As such, further automation is inevitable. If Nuance continues to experience rapid organic growth, it could reward shareholders with a market cap approaching any one of its component divisions when they were stand-alones and more.

Intersections

Intex is a company that specializes in credit reporting and identity theft management.

May 15, 2007

Diana Shipping

Singled out on Zack's as a very undervalued stock

May 2, 2007

Simpson Manufacturing

From the Fool:

Some of the biggest gains in the stock market come when a well-run, shareholder-friendly company goes on sale because of a distressing industry outlook. Simpson Manufacturing, a best-of-breed building-products maker that has seen its shares slip by more than 20% in the last year, could be one of those successful turnarounds. A quick glance at Simpson's ownership profile and historical financials shows some attractive bits of information.

The company's biggest shareholder, Barclay Simpson, has also been its chairman since 1994. Since then, the company has grown earnings at an average rate of about 17% while posting consistent returns on equity in the mid- to high teens.

Of course, it's the current state of U.S. housing that has many investors spooked, and, to be fair, Simpson's recent results haven't been so hot. In the last quarter, sales declined 10% while net income dropped 31%.

But according to many in our CAPS community, Simpson's competitive advantages at home (building codes require its products in several states), coupled with attractive expansion opportunities abroad, will be more than enough to get it through the real estate storm -- making 2007 an opportune time to get in on the cheap. With an EV/EBITDA of around 7, a dividend yield of 1.20%, and an immaculate balance sheet with over $148 million in net cash, this is one insider-owned stock that you might want to check out on CAPS.

To get you started, here are three of the many helpful comments you'll find inside.

* Fellow Fool and CAPS All-Star TMFBreakerTAllan: "Simpson has an unbelievable moat in its products -- it is not only the name brand in its field, it is almost universally required in building specifications and is named in building codes in Texas and California. It is about to undergo expansion into international markets. The stock was affected by the housing construction slowdowns and is likely to outperform in the next 3-5 years."

* Another one of my colleagues, CAPS All-Star TMF Platoish1: "They are the leaders in their niches and continue to innovate with new product offerings. Construction slowdown will effect them to a certain degree, but probably not to the degree that the market has discounted. This is a strong niche business -- nice and boring with fragmented competition. I think Lynch would like them."

* Finally, goalie37 sums it up with a concise pitch: "Great financials, nice moat with builders and building codes specifically requiring their products, lots of inside ownership, no share dilution, little debt."

An Eye Opening Acquisition

From the Fool

$23 Price Target on Select Comfort

From Zacks:

Zacks senior retail analyst Rob Plaza, CFA is reiterating his Buy recommendation on shares of furniture-maker Select Comfort (SCSS). For details, we excerpted the following from today's Buy report:

"We remain positive on Select Comfort shares, due to its significant long-term growth potential. The company's long-term goals include annual sales growth of 15% and annual earnings growth of 20%.

"What's more, the stock is trading at 17.8 times our 2007 EPS [earnings per share] estimate and 14.4 times our 2008 EPS estimate. We view this as an attractive valuation. We recommend purchasing the shares on dips. We reiterate our Buy rating and our target price of $23.

"Despite the below trend growth in the first quarter, Select Comfort increased its gross margin by 190 basis points. This is important because it shows that the company is not trying to chase sales with discounted prices. Select Comfort's second quarter outlook calls for earnings below year-ago last year's $0.19 per share. The company is one of the fastest growing companies in the furniture business."

Bio Marin a Good Opportunity

From Zacks:

Zacks senior biotech analyst Grant Zeng, CFA remains bullish on BioMarin Pharmaceuticals (BMRN). To find out some of the details, we gathered the following excerpts from today's Buy report:

“BioMarin Pharmaceuticals, Inc. develops enzyme therapies for serious chronic genetic disorders and other diseases and conditions. Its leading product, Aldurazyme, is used for treating the ultra-rare genetic disorder mucopolysaccharidosis-I (MPS-I). The company recently gained FDA [Food & Drug Administration] and European approval for another product, Naglazyme, for the treatment of MPS-VI and Orapred ODT for asthma in children.

“The company also presented positive data on phase III candidate Kuvan. The product pipeline is filling out and profitability is on target for 2008. We continue to rate the shares a BUY.

“Two recent deals with Serono and Alliant, along with a public offering of common stock and convertible debt, have reduced concern about the company's cash position. We believe the company now has sufficient cash to fund its operations until profitability.

“We upgraded the stock in early August 2005. Since then, the stock has more than doubled. We expect further appreciation, and our new price target is $24 per share.”