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PBSV: Results Remain Soft But Look For Growth in 2015

By Brian Marckx, CFA


Fiscal Q2 2014 Results: Revenue, EPS Miss For Second Straight Quarter. Stock Buyback Authorized…

Pharma-Bio Serv (PBSV) reported financial results for the fiscal second quarter ending April 30th.  For the second straight period both revenue and EPS missed our respective estimates, this is despite us making meaningful downward revisions to our model following Q1 results in late March.  PBSV noted that worldwide economic weakness and certain challenges (Obamacare, Puerto Rico Act 154) are effecting their pharmaceutical industry clients which have put downward pressure on the company's revenue.  And while the language in the 10-Q indicates that management expects these issues to continue to persist for at least the near-term, PBSV continues to invest in the business in anticipation that these headwinds will subside and return the company to positive revenue growth.  In the meantime, however, the increased investments in headcount and certain infrastructure, coupled with the recent slide in revenue, have significantly crimped net income and EPS (although both remain in positive territory). 

But while we now model fiscal 2014 revenue and EPS to fall 14% and 57% respectively, we continue to think 2015 will show meaningful increases in both the top and bottom lines.  The company just announced a stock buyback program was authorized by the board for up to two million shares - which could also incrementally bolster EPS.  And as PBSV's balance sheet remains flush with cash, their ability to fund the buyback is a non-issue.  

Q2 revenue of $6.6M was down 20% from the prior year comparable period and fell 6% from Q1 2014.  Revenue was more than $900k lower than our $7.5M estimate.  Similar to Q1 of this year, U.S. and European consulting revenue (which were catalysts in driving the 13% top-line growth in 2013), were the biggest laggards in the most recent quarter - falling 30% and 45% respectively. 

Q2 net income and EPS were $328k and $0.01, compared to our $1.2M and $0.05 estimates.  The miss on EPS was a result of a combination of the lower than expected revenue and higher than expected SG&A expense.  SG&A expense of $1.7M equaled 25% of revenue while we modeled 18% of revenue.  As noted, PBSV has been increasing spending on business development and operational activities to support anticipated increased demand in the U.S. and Puerto Rican markets.  While we have again made downward revisions to revenue and upward revisions to SG&A expense, we continue to expect increasing demand for the company’s services to result in revenue growth within the next several quarters. 

Importantly, the company maintains a very healthy balance sheet, ending the quarter with $12.8M in cash and equivalents and no debt or preferred stock.  Cash flow from operating activities was an outflow of $882k in Q2 but, excluding changes in working capital, cash flow from operating activities was an inflow of $440k.  In the event that PBSV repurchases the entire two million authorized shares, the company would likely continue to carry a sizeable cash balance.   

The most recent adjustments to our model resulted in a revision to our per share price target, from $3.50 to $3.00.  We are maintaining our Outperform rating.  See below for access to our full report on PBSV which includes our financial model and valuation methodology.    


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