We have initiated coverage of Biomerica, Inc. (BMRA). See below for free access to our full 16-page report on the company which includes our financial model and outlook and provides further discussion about the company, their products, and growth strategy.
By Brian Marckx, CFA
For over 40 years Biomerica, Inc. (OTC BB:BMRA) has been involved in the development, manufacturing and marketing of medical diagnostics products for the early detection and monitoring of chronic diseases and medical conditions. Their product line encompasses various diseases and conditions including tests for gastrointestinal/foodborne diseases, infectious diseases, diabetes, women's health, hormone levels and even some esoteric diseases. The company's particular focus is on gastrointestinal/foodborne diseases and diabetes.
The tests are sold into two major market segments, clinical lab and point-of-care (POC). Demand for the clinical lab products mainly comes from hospitals and clinical and research laboratories. The POC segment, which may hold particularly attractive opportunities for growth given recent technological advancements which have significantly improved speed and accuracy of certain rapid tests, includes the over-the-counter retail channel as well as physician offices. Biomerica sells through distributors as well as directly. The majority of Biomerica's revenue is generated from international sales, particularly from Europe and Asia, while domestic sales account for approximately 15% - 20% of total revenue.
Biomerica recently divested the bulk of their internal research and development department in order to focus on a strategy of in-licensing technology and products from other companies, universities and institutions which they expect to result in a greater rate of revenue and earnings growth. The company, with headquarters and administrative offices in Southern California, maintains a portion of their manufacturing facilities in Mexico which helps reduce COGS and operating costs. Since the R&D divestiture in July 2010 BMRA has made meaningful progress in pursuing accelerated growth including the acquisition of several new high potential products as well as consummating additional distribution agreements.
Relative to their financials, revenue grew 24% in fiscal 2012 and was up 19% in the first six months of fiscal 2013 (ending 11/30/2012), Biomerica has been consistently profitable over the last nine straight quarters, has regularly generated positive cash flow (from both an operational cash flow and free cash flow standpoint), and maintains a stellar balance sheet. Add to this the fact that executive compensation is relatively meager (possibly the lowest of any company we cover in the med-tech space), a minimal outstanding share count (7.4 million diluted, 7.0 million basic at most recent quarter-end), and obvious diligence on growing revenue while leveraging their cost base and we think all this is clear evidence that management and the board lead the company in a way with an eye on increasing shareholder value. In our experience, we have come across few companies that have been in existence over 40 years (as BMRA has) and possess all of these positive characteristics yet trade at what we would characterize as an incredibly cheap valuation. As of today's market price BMRA is valued at just 1.1x book value, only 11x trailing EPS, and just 6x our current year EPS estimate.
Given that BMRA trades at roughly book value, has liquid and high quality assets and no debt, and is generating positive cash flow (i.e. - book value is increasing), we see very little to no downside risk in the share price at this level. We think the cheap valuation may have more to do with BMRA being a nano-cap and suffering from a lack of exposure rather than having anything to do with fundamentals. We think the current market value grossly undervalues the company and recommend accumulating the shares up to our $2.70 price target.
To download a free copy of the full BMRA Initiation report, please click here: BMRA 1-24-13
FINANCIAL CONDITION / CAPITAL STRUCTURE
Balance Sheet / Cash Flow
Biomerica has a history of maintaining a healthy financial condition and remains that way currently. Cash balance at the end of the most recent reporting period (11/30/2012) was $1.2 million. BMRA has access to a credit line but has nothing drawn on it. Book value stands at $5.5 million and quality of assets appears reasonably strong. Intangibles account for less than 5% of total assets. Relative to A/R - one customer accounted for 60% of total A/R at 8/31/2012 - which does introduce some risk of customer concentration although there's no indication that there's any material credit risk with BMRA's A/R.
Biomerica is generating positive cash flow on both a cash from operations as well as a free cash flow basis (positive FCF over ttm). Through the three and twelve month periods ending 11/30/2012 cash flow from operations and free cash flow were;
3 months 11/30/2012: CFO = $67k, FCF = ($110)k
12 months 11/30/2012: CFO = $650k, FCF = $49k
Assuming BMRA continues to generate positive cash flow, book value should continue to increase. BMRA's ability to generate positive cash flow is due in no small part to their relatively meager CapEx needs and SG&A spend along with keeping manufacturing costs down (low cost facility in Mexico), exiting most R&D functions, and low overhead. We do not anticipate any significant PP&E/intangible asset purchases in the foreseeable future. Relative to SG&A we note that executive compensation is relatively meager and is possibly the lowest of any company we cover in the med-tech space (many of which, unlike BMRA, do not generate positive cash flow). We think this speaks loudly to management's and the board's focus on increasing shareholder value.
BMRA's capital structure is straightforward with no debt, no preferred, no convertibles or esoteric securities. Basic and dilutive share counts are 7.0 million and 7.4 million, respectively, which are impressively minimal and relatively very low compared to most micro-cap companies that we cover. Unlike many companies which struggle to maintain solvency and resort to regular and sizeable share compensation programs in an effort to reduce cash burn, BMRA funds itself with internally generated funds and does not have to rely on issuance of dilutive stock/options/warrants to maintain operations. We think this again speaks to BMRA's leadership and attention to increasing shareholder value.
Revenue Jumps on Strong Sales to Asia
Very strong double and triple digit revenue growth in Asia over the last six quarters helped push total revenue up 24% through the end of the most recent fiscal year (ending 5/31/2012) and up 19% in the first six months of fiscal 2013 (ending 11/30/2012). This recent run-up has resulted in sales to Asia accounting for 40% and 54% of BMRA's total revenue in the 12 and 6 month periods ending 5/31/2012 and 11/30/2012, respectively, compared to just 24% at fiscal 2011 year-end (5/31/2011). The company provides little in the way of detail relative to what's moving the numbers in the income statement but our best-guess is it may be a combination of recent product introductions, increasing interest in certain product lines (namely in gastrointestinal/fooborne and diabetes), and wider/increased distribution throughout Asia.
Meanwhile, sales to Europe were roughly flat in both fiscal 2012 (5/31/2012) as well as the most recent 6 month period (11/30/2012), accounting for 42% and 33% of total revenue, respectively. Domestic revenue dipped about 7% in 2012 and was down 17% in the first six months of fiscal 2013. Again, our best-guess is that in contrast to other parts of the world, a greater portion of revenue from the U.S. and Europe is generated from POC-related products.
Gross margin has improved from 30.8% in fiscal 2010 to 31.1% in 2011 to 37.8% in 2012 and was 41.9% through the first 6 months of fiscal 2013 (compared to 39.2% in the comparable prior year period). The majority of the widening of GM in 2012 and 1H 2013 is likely due to the big increase in sales over those periods, resulting in greater leverage of the fixed portion of manufacturing costs running through COGS. BMRA maintains manufacturing in Mexico which helps keep COGS down. We expect that continued growth in revenue will incrementally benefit GM going forward.
Operating Expenses Relatively Low and Leverageable
Similarly, operating expenses have shown regular improvement since 2010 (although by no means were they exorbitant in prior years). Operating expenses (R&D and SG&A) as a % of total revenue fell from 38% in fiscal 2010 (ending 5/31/2010) to 34% in 2011 to 30% in 2012 and were just 26% of revenue in the first six months of fiscal 2013 (compared to 29% in 1H 2012).
The improvement comes from a combination of the July 2010 divestiture of the bulk of the company's R&D assets and related activity, relatively minimal increases in compensation, and the aforementioned strong revenue growth through the most recent fiscal year and quarter ends. Also, similar to GM, we expect operating expenses will continue to be leverageable with growth in revenue.
Positive and Growing EPS
The combination of revenue growth, widening of GM and operating expense leverage has pushed EPS up from ($0.05) in 2010 to $0.02 in 2011 to $0.08 in 2012 and EPS was $0.07 (Q1 $0.04, Q2 $0.03) through the first six months of fiscal 2013 (compared to $0.05 in 1H 2012).
VALUATION / RECOMMENDATION
We've decided to use comprehensive number and variety of common metrics to value BMRA in order to underscore why we feel so strongly that the stock is not only undervalued but has very low downside risk at the current market value. Our comparable cohort consists of seven companies of various market capitalizations in the medical diagnostics space with products/services that target the POC and/or clinical lab markets.
On all seven metrics BMRA calculates out to be significantly undervalued (ranging from a low of $2.20/share based on P/E ttm to a high of $3.15 based on P/E FY1). We reiterate that we think our financial model may err on the side conservative - and if that is indeed the case, our calculated valuations (below) are also conservative meaning our $2.70/price target (based on the avg of all seven metrics) is still too low.
Relative to risk mitigation, cash flow and book value are key. BMRA's current enterprise value is just 5x EBITDA (compared to 29x comp avg) and market value is just 1.1x book value (compared to 3.2x comp avg). Biomerica is generating positive free cash flow (meaning book value should increase further), has liquid and high quality assets ($1.3 million cash, high quality A/R and inventory, minimal intangibles), and zero debt. We think all this adds up to very low downside risk.
In summary, we believe BMRA is significantly undervalued with some of the lowest downside risk available in the micro-cap space. We recommend buying the shares up to our $2.70/share target price and are initiating coverage with an Outperform rating.
Biomerica Stock Value Based On Comp:
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