Acton’s Psychemedics could prove to be lucrative sleeper

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I first noticed Acton-based Psychemedics several years ago when its shares were yielding 6 percent. When I looked into it further, I found the company was profitable, too.

I was thrilled with the discovery. But I also wondered why nobody else seemed to notice.

Psychemedics, which is headquartered at Nagog Park, provides testing services for the detection of drugs through the analysis of hair samples. Services are sold to such entities as employers, for applicant and employee testing; treatment professionals; law-enforcement agencies; school administrators; and even parents who may be concerned (or suspicious) of a child’s drug use.   

With our nation’s opioid epidemic raging on, a company like this stands to get attention. That said, Psychemedics’ more recent news centers around a contract it won a couple years ago to supply testing for professional drivers in Brazil.

This week Psychemedics released its second-quarter results, and some may view them as being a little disappointing. Revenue was $9.7 million, flat with the same quarter a year ago. Net income came in at $900,000, or 16 cents per share, which was lower than the comparable year-ago figure ($1.6 million, or 30 cents per share).

Shareholders indeed punished the stock. It closed Wednesday at $25.84, which was already down a little bit from its 2017 closing high of $27.15 on July 11. The second-quarter results were announced after the markets closed on Wednesday, and on Thursday the stock slid by $4.60 (17.8 percent) to close that day at $21.24. Today (Friday), as I write this, shares have declined even further, to about $20.50.

A price of $20.50 gives Psychemedics a yield of about 2.9 percent. The heady days of 6 percent payouts are probably gone, but nearly 3 percent isn’t too bad.

Psychemedics has paid a quarterly dividend consecutively for 21 years — it makes this clear in the opening paragraph of its second-quarter earnings report. But said dividend hasn’t risen steadily, as has been the case with other companies covered here, like Enterprise Bank and Raytheon. In fact, it’s been stuck at 15 cents per share, per quarter, since 2012. In 2008 it was as high as 17 cents per quarter, with a special 50-cent-per-share payout in the fourth quarter of that year. The current payout ratio, according to statistics posted in Yahoo finance, is 40 percent, meaning the company pays out 40 percent of its profits in dividends. So there’s some room to grow it again.

CEO Raymond Kubacki noted in this week’s release that while the second-quarter results “may appear to be disappointing,” he added that they “do not reflect the underlying strength of the company.” He also noted that the second quarter is the first in which the company has a year-over-year comparison that includes its new Brazilian market.

Kubacki then presented a strong case for why the Brazilian deal is going to be lucrative going forward. I’ll give his case here, as taken from the aforementioned press release:

  1. It is a large and expanding market. The Brazil professional driver market is large by law (all professional drivers must pass a hair test in securing and renewing their driver’s license), and it is also expanding by law (the law requires that in September 2018, professional drivers must renew their licenses every 2½ years, instead of the current every 5 years). This virtually doubles the size of that major portion of the market. At the same time, the great success of this professional driver program (highlighted below) has the government discussing and considering possibly requiring a hair test for some other types of drivers licenses. These factors and results have given us confidence in the long-term attractiveness of this market.
  2. We have recognized from the beginning that there are greater uncertainties and continual challenges that accompany any new, large market as it develops, and we plan to address them, as they may occur. In the past quarter, we have made a number of strategic decisions and are implementing a number of strategic initiatives that we believe are in the best long-term interests of the company. Our market share remains strong and we have taken further strategic actions to solidify and strengthen our long-term position in the market.  In addition, we now have established a wholly-owned subsidiary in Brazil and have brought on a Country Manager, a Brazilian national to manage our business in Brazil and work with our distributor. We believe in the long-term attractiveness of this market and are willing to make short-term investments and sacrifices. As you know, public companies are often criticized for managing too much for the short term. With these strategic initiatives, we believe we are managing the company for the long term.

Kubacki then threw out some impressive numbers, including that highway deaths and disabilities in Brazil declined by 39 percent during the first year of the testing. Perhaps more telling, 31 percent of professional drivers chose not to renew their licenses, a sign that the bad apples are being weeded out.

Finally, the CEO goes on to mention that Psychemedics’ U.S. business is “gaining strength.” I would be interested in hearing in the not-too-distant future of other international opportunities; after all, if this technology is such a hit Brazil, why can’t it be anywhere else?

I don’t own Psychemedics at this time, but I am starting to pay closer attention again. There seems to be a lot of promise, and the company has shown a willingness to pay dividends to those willing to wait for growth. Dividends are a big part of this blog’s point of emphasis. A modest dividend now looks awfully good 10 years down the line if it gets steady increases while you hold shares.

The company’s other stats are pretty good. Psychemedics now sells for 13.8 times its last 12 months of earnings, and 2.6 times sales. It’s not particularly volatile, as its beta of 0.96 suggest it’s actually a smidge less volatile than the typical stock. It has nearly $7 million in cash, against $3 million in debt.

Lastly, Psychemedics is not a well known or heavily traded stock; its average daily volume is less than 30,000 shares daily. Even when investors reacted after this week’s earnings report, Thursday’s trading amounted to 128,500 shares, or about four times typical volume. That still isn’t a lot. And I like that, because if you’re in before the institutions, you get to ride their coattails once they decide the company is worth their attention.

Psychemedics, at the very least, appears to be a promising sleeper. Should its expectations in Brazil and beyond come to fruition, it could be a lot more than that.

Enterprise Bank, a model for internal growth, opens 24th branch

 

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Lowell-based Enterprise Bank recently opened its 24th branch office, at 15 Indian Rock Road in Windham, N.H. 

It’s easy to forget that Lowell’s Enterprise Bank has yet to see its 30th birthday. Steady growth will do that, and then some.

Sometime in recent days — I can’t pin it down, although I drive by nearly every day — Enterprise opened its 24th branch office. It’s at 15 Indian Rock Road in Windham, N.H. That address sounds like it might be somewhere in the proverbial sticks, but it really isn’t. It’s Route 111, a major thoroughfare connecting commuters from Nashua and Hudson to I-93 on the other side of Windham, abutting the Salem line. The road is essentially the main street of Windham, a bedroom community that in recent years has chipped away at developing a commercial center. There’s a wine shop, a 24-hour fitness center, the expected gas station/convenience store and several other small businesses. There’s a Shaw’s supermarket up the street. Plenty of traffic.

But there’s also only one other bank in the vicinity, and I say that with some degree of hesitation. A Santander Bank branch sits well off the road about a half-mile east, hidden partially behind trees and the aforementioned Shaw’s. It’s pretty easy to miss, unless you’re looking for it.

So this is (another) great opportunity for Enterprise Bank to gain market share organically, something it’s been quite adept at ever since founder George Duncan decided to start the institution from scratch in the midst of a national savings and loan scandal, in 1988.

Did you know…. that Enterprise has posted net income of more than $20 million in the 12 months ended June 30? That’s roughly $1.77 per share. Perhaps more impressively, the bank seems to announce 8-11 percent year-over year growth in categories such as loans, deposits, net income and total assets almost like clockwork.

Ask Duncan (still whistling to work each weekday, at age 77) or CEO Jack Clancy how the bank manages to do this, and you get the same canned answer(s): contributions from our dedicated team, community involvement, relationship building and a customer-focused mindset.

Sure, it sounds corny. But it’s true.

Enterprise’s growth kicked up a notch last year, and  investors noticed — the stock closed out 2016 at $37.26, about 70 percent higher than its low for the year. This brought the bank’s price-earnings ratio up to the mid-20s, which is rather rich for a bank stock.

But while the growth has continued at a high level (the second quarter brought a 17 percent gain in net income, for example), shares have stagnated. They closed Tuesday at $33.98, down nearly 9 percent on the year. The price-earnings ratio has settled to about 19 — still not cheap, but not exorbitant for a proven grower.   

Longtime observers will point out the fact that this is a stock that rewards its investors with dividend hikes each year. Enterprise currently pays 13.5 cents per share, per quarter, or 54 cents per year. The yield is modest (1.55 percent),  and so is the annual increase — 2 cents per share, per year, since 2008. But for 10 years running, and I don’t have to remind you that this period encompasses a rather nasty economic downturn, you’ve been getting that raise. And longer than 10 years ago, the annual percentage gains were higher.

Has your job been as dependable in terms of issuing raises?

Suppose you bought shares on June 30, 2008. You would have paid about $11.75 apiece. The annual dividend then was 38 cents per share, or 3.2 percent. Not too bad. Now suppose you held those shares until now. Well, in 2017 you’re getting 54 cents per share for those same shares (which have tripled in value, by the way). That’s a yield of 4.6 percent, based on the 2008 price that you paid. See? The yield only looks puny when you compare with shares bought today. If you’re a buy-and-hold investor with a steady dividend payer (and increaser), the yields look a lot better.

A year or two ago, a colleague of mine asked me if it was a good idea to add to his Enterprise holdings. They were trading at about $24 at the time. I responded that I thought the price was a bit rich, that he would likely get them for a cheaper price a few months hence.

I was wrong. Dead wrong. It wasn’t until this year that the rally ended. Actually, more like plateaued. It just goes to show (again) that just because a stock goes up, doesn’t mean it won’t go up more. If it’s a well-run company, and pays an increasing dividend each year (the two often go hand in hand), there’s rarely a bad time to get a piece of the action.

I worked in Lowell for more than 20 years. I can say I would be hard-pressed to find a public company that’s as well-run as this one.      

Ocular Therapeutix reboots; investors hope to do the same

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What’s happened over the past month at Bedford-based Ocular Therapeutix is a textbook example for the theory that putting money into the shares of biotech startups is not in any way investing. It’s gambling.

I mean, there’s nothing in the fundamental financials that suggests that such companies are in any way fit to absorb your hard-earned money. You’re just hoping that whatever secret potion is being developed gets a nod from the almighty Food and Drug Administration. Failing that, it is likely that the value of  your investment shrinks, perhaps considerably.

And so, Ocular (OCUL on the Nasdaq).  The company, as best I understand it, is developing products that heal wounds incurred during various eye procedures. Pretty niche, but certainly not unimportant.

Ocular has been around for more than a decade, but it’s still not close to profitability. For 2016, it posted a net loss of $43.3 million on revenues of nearly $1.9 million. See what I mean? Quite a gap there. The first quarter of this year (net loss of $15.7 million on revs of $475,000) suggests little headway in this area.

Nevertheless, shares began 2017 at $8.37 and moved into double digits by springtime. They topped out (in terms of daily closing price anyway) at $11.54 on June 22.

Approximately a month ago, Ocular learned that one of its flagship drugs, Dextenza, was rejected by the FDA. The Boston Business Journal reported that the reason was because some manufacturing issues caused some batches to become contaminated (the drug is designed to treat pain following eye surgeries).

Uh-oh. Goodbye, double-digit stock price. Shares nosedived below $6.50, where they have percolated in a fairly narrow range for the past couple of weeks.

And today (Tuesday), after the markets closed, Ocular announced that it was cutting about a fifth of its roster, believed to be some 25 workers. This is going to cost the company about $1.5 million, including severance and benefits, but will save money going forward (obviously) in the form of a slimmer payroll. And so, after gaining 13 cents during regular trading, shares of Ocular edged up another 13 cents, to $6.59, in after-hours activity.

Oh, and the usual legal procedures have ensued as well. Lawyers have been busy filing claims that the company knew more than it let on about the aforementioned manufacturing issues.  

And did we mention there’s a new CEO? To be fair, Ocular announced this was coming before the FDA rejection, but now that the cuts have been made, it’s official: In is Anthony Mattessich, and moving to executive chairman is outgoing CEO and co-founder Amar Sawhney.   

With all that said, if you were among those who bid shares up this spring in hopes of an FDA approval, you have been certainly disappointed. Furthermore, you likely know by now that getting shares back up to prior levels is highly unlikely to be accomplished with cost-cutting.

No, this company has to get you excited again. For what it’s worth, it’s not giving up on getting FDA approval for Dextenza. But next week, you get a second-quarter earnings announcement. And that’s probably not going to provide much cheer.

Buying shares of companies like this can be a rush, especially if a few clinical trials go the right way. But face it: Unless you are a insider among insiders, you really have no way of knowing how that will go (and even then you likely don’t). That’s not investing; it’s gambling.

Wilmington’s UniFirst names next CEO

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Steven S. Sintros

UniFirst Corp., the Wilmington-based provider of workplace uniforms and laundry services, is going outside the founding family to replace its chief executive.

According to a report in the Boston Business Journal, the company, which posted fiscal 2016 sales of nearly $1.47 billion, has named Chief Financial Officer Steven S. Sintros as president and CEO, replacing the late Ronald Croatti.

Croatti died in May of complications from pneumonia, according to the report. He was 74 years old and had been chief executive since 1991. His father, Aldo Croatti, founded UniFirst in 1936.

Sintros, 43, has been with UniFirst since 2004. He has been CFO for eight years.    

Citing a regulatory filing, the Journal reported that Sintros will remain CFO until that position is filled.

Shares of UniFirst closed Friday at $142.25, down less than 1 percent so far this year. But as recently as February 2016, they were selling for less than $100 apiece.

Analysts are expecting UniFirst to report sales of about $1.58 billion for the current fiscal year, which ends this month. That would represent about a 7.5 percent increase from fiscal 2016.

UniFirst also rents and sells industrial wiping products, floor mats, facility service products, dry and wet mops, and restroom supplies.