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.

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