Home > Stock Analysis

Micro Caps With Healthy Prospects

Posted: Apr 28, 2008 09:55 AM by Will Ashworth

Tickers in this Article: FHC, OMPI

Stock screens can be a great way to shake up your thinking and to produce a few new investment ideas. My latest screen was micro caps between $50 million and $200 million. The screen came up with a handful of promising stocks, but Female Health Company (AMEX:FHC) and Obagi Medical Products Inc. (Nasdaq:OMPI) stood out from the rest. These companies fill unique consumer niches - and they do it well. Let's take a look at these companies and their prospects going forward. (For background reading, see How To Evaluate A Micro-Cap Company.)

Get Free Stock Analysis By Email

Female Health Company
The company takes women's health seriously. It's the creator of the FC and FC2 Female CondomÒ, which protect against both pregnancy and sexually transmitted diseases. The original FC Female Condom got its start in 1992 in Europe and was approved by the Food and Drug Administration in 1993. Sales grew slowly as the company educated women about the benefits of such a product, especially those in poorer countries. After many years of effective use, the company decided that a new and improved Female Condom was necessary and so in 2007, it introduced the FC2, a product that provided the same protection, but could be produced at a much lower cost. Finally, it had a product it could produce safely at high volumes at a cost that was competitive with male condoms. The company was off to the races.

Profit Now and Later
Female Health Company made an operating profit in 2006, albeit a small one. In 2007, this profit increased 264% to $875,908. Sales last year were up 30% from $14.82 million to $19.32 million and it appears this momentum has carried into 2008. First quarter or fiscal year 2008 (ending December 31, 2007), operating profits were up almost $1 million dollars, from -$218,406 to $729,645. That's some improvement! Even better, sales were up a whopping 37% to $5.7 million. The first quarter profit was the highest quarterly profit in company history. Clearly, the Female Health Company has come a long way. But can this company maintain its momentum? I think so. (For related reading, see Venturing Into Early Stage Growth Stocks.)

For one thing, AIDS and other sexually transmitted diseases are a persistent health issue in many parts of the world. The FC2 is available in 116 countries around the world and is distributed mostly by public sector aid agencies to those in need. FHC also owns the rights to the FC2 in several regions around the world such as the U.S., U.K., Japan, Europe, People's Republic of China and Canada. According to the United Nations, between six and nine billion male condoms are distributed by public sector agencies annually. By comparison, about 25 million female condoms are distributed each year. This suggests that there may be opportunity to narrow the gap. In addition, producing more female condoms should cause the price to decrease.

Obagi Medical Products Inc.
Skin, we all have it. Yet many of us, especially women, aren't satisfied with the appearance of their skin. At least that was the responses to a January 2008 Obagi-sponsored survey. Obagi Medical Products, the maker of prescription-based skin care products, hired the Segmentation Company to survey 1,005 women aged 18 to 75 about their skin. It found that 47% of the survey group was not happy with the condition of their skin and 84% said they had at least one issue with their skin. Enter Dr. Zein Obagi, noted Beverly Hills dermatologist. In 1988, Obagi created the Nu-Derm System, a group of products meant to improve the damaged layers of skin by improving cellular function. Translation: the product is designed to improve the appearance of users' skin.

The products are generating a following and company sales have grown steadily. In 2001, the company did $35.6 million; in 2007, that number grew to $102.6 million, a compound annual growth rate for those six years of 19.3%. However, that doesn't tell the whole story. Revenue growth in 2007 increased 32% to $102.6 million, while operating income was $27.7 million, up 56% year-over-year. Obagi went public in December 2006 at $11, hit a peak of $25.60 in late 2007, and closed on Friday April 25 at $7.30. Much of the drop is due to 2008 guidance by the company; in its March 3 press release announcing year-end earnings, it said 2008 sales would increase by 18-22% and earnings per share would be between $0.94 and $0.98. Analysts wanted more and the stock dropped 32% the next day to close at $10.11. In these markets, any hiccup is a bad thing, but I believe the market overreacted, creating a good buying opportunity.

Bottom Line
Business is about successfully filling needs in the world. Both the Female Health Company and Obagi Medical Products do this well. There is good evidence to suggest that both of these companies would make excellent candidates for investment.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS