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PMD - Psychemedics


spartansaver
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Hair follicle drug testing company that consistently makes money. Likely selling for around mid-single digit normalized earnings. Generates attractive returns and grows low single-digits. Company may be in the process of selling itself. I own shares.

 

From Q2 earnings release two days ago:

 

"Our G&A expenses showed a substantial increase in the quarter due primarily to a significant increase in legal expenses.  This was due to two unusual factors: a) last year’s 2Q had a credit for some legal expenses due to an insurance reimbursement and b) this year’s 2Q included a significant amount of legal expenses related to discussions we had regarding potential strategic transactions.  As a result of being approached by third parties, our Board of Directors authorized the Company to explore strategic alternatives to enhance shareholder value.  As a result of this process, during the quarter, the Company incurred increased legal costs.  The Company does not intend to comment further or update the market with any further information on the process unless and until the Board of Directors has approved a specific action.  There can be no assurance that this process will result in any definitive agreement, any specific action or change in current strategy."

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Long past profitable business history of PMD gives some hope that there is some value in the stock at present valuation. But there is no balance sheet safety. Will work-from-home change some attitude of business owners towards testing. I dont think so. I own it in my portfolio and planning to add more if it goes down further. Still trying to understand more.

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I think there is a strong chance that this company will get acquired in the next quarter at a significant premium. 

 

1. August 2020 - company announces a significant increase in legal expenses due to being approached by third parties.

2. September 2020 - company announced changes to managements change of control payout.  It was previously based on total compensation for prior twelve months, and is now based on the HIGHER of total compensation for prior twelve months and the twelve months preceding August 2020.

3. November 2020 - Off-cycle RSUs issued to management and board.

4. November 2020 - CFO of company left.  No commentary regarding plans to replace.

 

In addition, Peter Kamin (former founder of ValueAct) acquired +5% of shares in November / December. 

 

Absent a buyout, the company is trading at 3-5x normalized EBITDA, driving significant downside protection.  In the legacy US operations, I think the company will report strong earnings over the next two years as hiring comes back (driving drug tests). 

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Peter kamin of CLWY, RWWI, and TTSH fame has filed a 13d on this company, and, it seems like there is some I retesting stuff in the pipeline once the feds give the go  ahead for hair testing in the trucking industry. May take a year or so to recover, but this seems really cheap in the low sevens, considering there is basically no leverage, they have a history of dividends, and the like.

 

https://cdllife.com/2020/mandatory-hair-testing-is-one-step-closer-feds-confirm/#:~:text=The%20proposal%20seeks%20to%20sample,tests%20are%20cheaper%20to%20administer

 

 

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I think there is a strong chance that this company will get acquired in the next quarter at a significant premium. 

 

1. August 2020 - company announces a significant increase in legal expenses due to being approached by third parties.

2. September 2020 - company announced changes to managements change of control payout.  It was previously based on total compensation for prior twelve months, and is now based on the HIGHER of total compensation for prior twelve months and the twelve months preceding August 2020.

3. November 2020 - Off-cycle RSUs issued to management and board.

4. November 2020 - CFO of company left.  No commentary regarding plans to replace.

 

In addition, Peter Kamin (former founder of ValueAct) acquired +5% of shares in November / December. 

 

Absent a buyout, the company is trading at 3-5x normalized EBITDA, driving significant downside protection.  In the legacy US operations, I think the company will report strong earnings over the next two years as hiring comes back (driving drug tests).

 

FWIW, CEO dashed water this week on a buyout. He said there was no "exit strategy" and it seemed to be pretty clear that nothing was on the table and they weren't actively pursuing it.

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