PBSV: Cash Flow Positive And Trading Below Book Value
OTC:PBSV Fiscal Q4 2015 Results: Revenue Underwhelming But EPS Inline and Still Churning Positive Cash. Near-Term Investments Expected to Reignite Top-Line Growth… Pharma-Bio Serv (PBSV) reported financial results for the fourth fiscal quarter ending October 31, 2015. Revenue was underwhelming, falling on both a yoy and sequential basis, coming in below our estimate and marking the eighth straight quarter of yoy contraction. All major itemized revenue segments exhibited a contraction aside from lab (microbiological and chemical testing). Both the U.S. and European consulting segments, which turned in sequential growth from Q2 to Q3 and which we had hoped marked a positive turning point, saw revenue fall more than 60% in Q4 and more than 50% for the full year. Meanwhile, Puerto Rico has been much more resilient, while down 4% in the quarter, that territory turned in 12% growth for the full year which was facilitated by projects in Latin America which are managed from Puerto Rico. PBSV is looking to restart revenue growth and expects to put some of their $14.9M cash balance to work, noting in the 10-K that, “We are constantly realigning our business strategies to grow our business. As such, the Company management understands that planned infrastructure investments on human capital, new markets, and Lab facilities and equipment during fiscal year 2016 will provide sustainable growth to the Company in future years. For the year ended October 31, 2016, the Company intends to invest approximately (i) $1.7 million on new business development positions on consulting targeted new markets, and (ii) $2.0 million for the expansion of our Puerto Rico Lab facilities, openings of a Lab facility in Spain and the Calibrations division facility in Puerto Rico. The Company’s working capital will be used to fund these investments” As a reminder PBSV recently formed a new PR-based Calibrations division called Metrologix – while the company had previously expected this to be operational by October 2015, based on the language above, it appears this timeline may have slipped. And in April 2015 PBSV formed Pharma-Brazil, a wholly-owned subsidiary which will provide consulting services to the Brazilian market. Pharma-Brazil still remains in the development stage but offers another potential opportunity to contribute to revenue in future periods. Given the recent strength in Latin America-related project demand and revenue, this area of the world, including Brazil, could offer meaningful growth opportunity for PBSV. And despite the recent consistent yoy contraction in revenue, including a 15% dip for the full fiscal year 2015, PBSV continues to remain in the black. Q4 and full year 2015 net income and EPS were $524k / $0.02 and $1.6M / $0.07 – which was inline with our estimates. And the company continues to generate positive cash flow including $372k in 2015 - or almost $2.1M excluding changes in working capital. The positive cash flow helped push book value up from $20.5M at the close of fiscal 2014 to $22M at fiscal 2015 year end. So while top-line growth has stalled there are reasons to remain interested in PBSV – including reinvestments and new segments expected to come online which are expected to reignite sales growth, ongoing positive cash flow generation and increasing book value. In fact the stock currently trades at a discount to book value – which, based on the company’s history of generating positive cash flow and increasing its book value, presentswhat we believe is a particularly opportune time to buy the shares. And PBSV had previously noted the possibility of an acquisition (in December 2014 PBSV engaged a firm to explore M&A opportunities) – if it were to happen, this could be another catalyst for growth. Q4 revenue was $5.9 million, down 18% yoy, down 5% sequentially and 7% lower than our $6.3 million estimate. As has been the case for the past several quarters, U.S. and European sales remained tepid. U.S. consulting revenue fell on a yoy basis by 67% and 65% in Q4 and the full year, respectively, while European consulting revenue fell 63% and 51% over the same periods. U.S. had accounted for 28% of total revenue in fiscal 2014 – this fell to just 12% in 2015 – which represents the bulk of the contraction in total company revenue over that period. And while Europe has been similarly soft, although not nearly as important a territory as the U.S. (Europe accounts for just 5% of total revenue), this could represent an area of growth as PBSV expects to open a lab facility in Spain. As a reminder, the bulk of European revenue has related to just one customer in Ireland – so a new lab facility in Spain has the potential to significantly benefit revenue in this segment. Puerto Rico (most notably projects in Latin America managed in PR) has been one of the only bright spots - with revenue growing 12% for the year and now accounting for 75% of total revenue – up from 57% in 2014. With PBSV investing more capital in the build-out of their PR facilities, we model this segment’s growth rate to steepen further. And as we have noted in the past, a higher percentage of revenue from PR has tax benefits as revenue generated in that territory is taxed at just 4% (as a result of the company's beneficial PR tax status), compared to a maximum regular federal income tax rate of 35% for U.S. operations. This is highlighted in the aggregate income tax rate, which fell from 16% in 2014 (when PR and U.S. revenue accounted for 57% and 28% of total sales, respectively) to just 9% in 2015 (when PR and U.S. revenue accounted for 75% and 12% of total sales, respectively). So, the shift in geographic revenue mix essentially added almost $119k, or about 8% more to net income in 2015. Gross margin was another highlight in Q4. At 34.8% it was the highest since Q4 2013, well ahead of the 31% average posted through the first three quarters of 2015 and better than our 32.1% estimate. We continue to look for widening of gross margin with growth in revenue. OpEx was $1.4M and dead-on with our estimate. PBSV has been diligent on trimming costs where there are opportunities which has resulted in declining OpEx over the last few quarters. For the full year OpEx was $5.7M, down from $6.1M in 2014. PBSV is guiding for $1.7M in additional expense during 2016 related to the build-out of new business development positions related to new markets. While we expect revenue to benefit incrementally from these investments during 2016, we model a more substantive contribution in 2017 and beyond when we expect the additional operating expenses to be more fully absorbed. Q4 net income and EPS were $524k and $0.02, largely inline with our $503k and $0.02 estimates. Despite the yoy contraction in revenue over the last eight consecutive quarters PBSV continues to generate both positive net income and cash flow. Cash flow from operations was $372k in 2015 - or almost $2.1M excluding changes in working capital. The company exited the year with $14.9 million in cash and securities. Model Updates… We have made some updates to our model following Q4 results. The planned investments add meaningfully to our OpEx and the lingering softness in revenue has adjusted our near-term 2016 quarters lower. But, we think these investments in infrastructure, personnel and entry into new territories – assuming PBSV can successfully replicate their business model – should result in steepening of the revenue growth curve. We incorporate a greater rate of sequential revenue growth in the second half of 2016 related to this as well as the recent strength in Latin markets. We model mid-single digit revenue growth for the full year. 2017 and beyond should fully benefit from these investments which is reflected in the higher rate of growth. Valuation / Recommendation Based on our model we look for EPS to grow at a 4-year CAGR of about 23% through 2019. We use an industry PE/G ratio of 1.5x to value PBSV. We look for 2017 EPS of $0.06 which values the company at approximately $2.00/share. The stock currently trades at about $0.83, indicating the shares are trading cheaper than fair value. We also note that book value (as of October 31, 2015) is $22 million or only about 115% of current market value – which should provide a fairly solid floor on the stock price. And given PBSV’s long history of cash flow generation, which has continued during the recent slide in revenue, we think it is reasonable to expect book value to continue to grow, raising this floor and further reducing any downside risk. We recommend accumulating up to our $2.00/share price target. We are maintaining our Buy rating. See below for access to our coverage of PBSV. READ THE LATEST FULL RESEARCH REPORT HERE SUBSCRIBE TO ZACKS SMALL CAP RESEARCH to receive our articles and reports emailed directly to you each morning. Please visit our website for additional information on Zacks SCR and to view our disclaimer.
