On the first trading day of 2019 PD-Rx Pharmaceuticals reported its annual results for the 2018 fiscal year that ends on June 30. PD-Rx is one of these stocks that is wonderfully easy to keep track of. The company releases financial information just once a year, and the two dozen pages that make up the annual report and the accompanying financial statements are easy to comprehend while painting a useful picture of how things have been going.
Last year was actually packed with an unusual amount of action for PD-Rx. The company paid a nice $0.66/share dividend in May, and a big $2.20/share dividend in December (after the end of the fiscal year). I was hoping that the dividends signaled that business was going well, but after looking at the latest results it seems that they simply decided to return excess cash. An excellent decision in my opinion, and even after these two dividends half of PD-Rx’s market cap consists of cash and certificates of deposit. Knowing that they are happy to return large amounts of cash to shareholders makes me more confident that we don’t have to place a discount on their remaining cash reserves.
Looking at the results of 2018 we see a bit of a mixed result. Revenue went down a bit while their gross profit margin increased. If they managed to keep their SG&A costs stable, 2018 would have been a pretty good year, but unfortunately they didn’t, and as a result they earned exactly the same $0.38/share this year as last year. Especially with a lower effective tax rate in the 2nd half of their financial year that’s a bit disappointing. Some of the increase in SG&A spending can be traced back to increased levels of advertising spending, which presumably isn’t money thrown down the drain, but I can’t say I like the sudden jump, so I can sort of understand why the stock price went down after the publication of the results. At the same time, it also makes that the stock remains a pretty attractive deal. For $4.19/share you are getting $2.09/share in cash and $0.38/share in earnings. You don’t need a fancy valuation model to know that that’s not bad.
Last five years of PD-Rx’ financial results with the 2018 cash balance adjusted for dividend in December 2018
PD-Rx Pharmaceuticals posted their 2017 annual report online yesterday. Last year was a pretty solid year with revenues increasing by 21% from $21.5 million to $26.0 million. Net income saw a similar percentage increase and went from 0.30/share to 0.36/share. Given that PD-Rx’s past revenues have been somewhat volatile I don’t think we should put to much weight on this growth, they are now basically back to the level they achieved in 2013. As always, the company provides a nice overview of historical annual sales in a “classic” PowerPoint look:
Besides good operating performance there were two positive developments during the year. First of all, the company paid its first ever dividend in June this year. Compared to PD-Rx’s cash balance of $4.85/share the dividend of $0.30/share was not very big, but it does represent a 82% payout ratio for the year. Hopefully this wasn’t a one-off occurrence.
Secondly, the passage of Trump’s tax bill should provide a nice boost to earnings in the years to come. PD-Rx Pharmaceuticals, like many US micro-caps, pays the full US corporate tax rate, so the drop from 35% to 21% should boost earnings by approximately 22%. If we crudely value PD-Rx at the value of its cash balance plus ten times 2017 earnings, value per share jumps from $8.49 to $9.33 if we adjust for the lower tax rate. Given that shares currently trade at $5.65 I still think they offer a pretty compelling opportunity.
Author is long PDRX
Last year I wrote a blog post titled “PD-Rx Pharmaceuticals reports great FY2014 results“, but unfortunately, I can’t repeat that exercise this year. While it was likely that this year would be worse than the 2014 record year, 2015 was also worse than expected. Revenue dropped 33% from $29.1 million to $19.4 million while earnings dropped 72% from $2.0 million to $0.5 million. The company doesn’t go into a lot of details what’s the cause, except that they lost “significant sales in a single sector due to a loss of market demand for a single drug”.
I think that this is a risk that you just have to accept when you invest in smaller companies. They are often less diversified with regards the products they offer and the number of customers they have. The biggest product of PD-Rx now represents 16% of sales, so they should now be a bit less risky (it was 49% in 2014!). Another factor that reduces the risk investors in PD-Rx face is the large cash balance that the company owns. PD-Rx currently has a $9.8 million market cap while they also have a net cash balance of $6.2 million. Because of the large cash balance, I think the stock is still pretty cheap at the moment (and on the edge of becoming a net/net once again), although it remains unclear what plans the company has with it. It has slowly been building up for years now.
I have compiled an updated table of PD-Rx’s financials below. As visible historical results have been volatile – but consistently positive – in the past. Since the company only releases results once a year we have to be patient to see if they can recover next year.
Author is long PDRX
When I initially bought PD-Rx Pharmaceuticals a bit more than a year ago I was mainly attracted to the company because it was cheap on almost all metrics while it has a solid history of growth and profitability. The great thing about a blog is that you often have visitors that know more about the company than you do, and in the case of PD-Rx someone mentioned that a big competitor had left the business. Because of that development I expected that fiscal year 2014 would be a good one, and the company didn’t disappoint today.
Revenue was up 12% and, thanks to higher margins and operating leverage, earnings increased with a whopping 63% from $0.70/share to $1.14/share. The market didn’t ignore this, but with the stock up 52% it is – based on trailing earnings – just as cheap today as it was yesterday. The company is now trading 6.7x PE-ratio which is pretty cheap in itself even if you don’t expect any growth going forward. At the same time this ratio doesn’t give the company credit for the large, and rapidly growing, cash balance. The PE-ratio ex-cash is just 3.5x and the EV/EBIT ratio is now 2.2x. Amazing to have a stock in your portfolio that is up >150% but is still at this valuation.
Author is long PDRX
PD-Rx Pharmaceuticals posted their 2013 annual report online yesterday. PD-Rx has been receiving some attention this year, and I don’t think this has gone unnoticed at the company since the CEO explicitly welcomes the new shareholders in the annual report. What I found very positive is that this is accompanied by an increased amount of information about the business. The 2013 annual report is the longest one since 2009 (I don’t have access to older versions) and it doesn’t even include the financial statements. Instead they have provided a link to the full audited statements that include all the footnotes.
Compared to SEC-reporting companies the amount of information that PD-Rx provides to it’s investors is of course still limited, but I do think that PD-Rx’s reaction the increased investor interest is very encouraging with respect to the shareholder friendliness of the company.
But what really matters is the financial performance and PD-Rx doesn’t disappoint here. Revenues increased by only 2 percent, but net profit jumped 74 percent from $0.40/share to $0.70/share. The increase in profitability is for a large part attributable to a decrease in SG&A costs of $348,000, and a large part of this amount can be explained by lower shipping costs ($145,000) and lower advertising costs ($33,000). I don’t know if this is sustainable – especially the shipping costs are substantially lower – but it does create a ‘pretty’ picture:
What’s also worth mentioning is that the company bought back 44,609 shares (approximately 2.5% of the outstanding share capital) after the end of the period at an average cost of $2.74/share. I think this is probably a repurchase from an employee that left the company or something similar and I don’t think it really signals anything w.r.t. future capital allocation plans, but it is nevertheless good to see.
Long PD-Rx Pharmaceuticals