Psychemedics Corporation (PMD): Investing In Hair Detection

[Ed. Note – This article does not meet our new editorial guidelines, nor does the company profiled meet our investment criteria. Both will be removed from the site in the future.]

Psychemedics Corporation (PMD) is a Boston-based drug testing services company that detects abused substances by analyzing hair samples. Its technology provides quantitative details about the approximate amount of drug taken along with historical data. Psychemedics uses industry-accepted practices for commercial testing and confirmation of marijuana, heroin, hydrocodone, cocaine, phencyclidine (PCP), hydromorphone, methamphetamine and several other drugs. Psychemedics conducts all the testing services in its Culver City, California laboratory.

Thousands of clients across the world, including over 50 of Fortune 500 companies, use Psychemedics’ patented process for random and pre-employment drug testing. Several large banks, police departments, schools and other organizations rely on Psychemedics’ technology.

In February, the company also signed an agreement with TruTouch Technologies that allows Psychemedics to market TruTouch’s biometric and rapid optical alcohol detection test in the United States.

Earnings & Financial Position

Psychemedics Corporation recently announced its first quarter results. Total revenues for the January-March quarter came at $6.4 million, up 3% from $6.2 million in the same period last year. Net profit was $822 thousand or $0.16 per share, compared to $827 thousand in the first quarter of 2012.

Psychemedics increased its quarterly dividend from 12 cents to 15 cents a share, which represents 5.15% dividend yield. It is the 67th consecutive quarterly dividend distributed by the company. PMD had reduced its dividend payout during the 2009 financial crisis from 17 cents to 12 cents a share. The drug testing company’s dividend payout ratio stands at 100%, but it looks sustainable. Psychemedics has zero debts and promising growth prospects.

For the past 10 years, the company’s earnings have been increasing at about 10% annually. But earnings have grown at 25% a year since 2010. Psychemedics’ P/E ratio is 19.81. The company reported a CapEx of 1, 1 and 2 million dollars in 2010, 2011 and 2012 respectively. It has been a big drag for the past three years. Psychemedics has a strong balance sheet with $2.5 million in cash at the end of 1Q2013.

Book value of PMD is estimated at $2/share, of which 50 cents is cash. Since last year, the company insiders have increased their stake in the company by 55%. By the end of the first quarter, the key company insiders own 5.3% outstanding shares of the company.

Conclusion

Psychemedics has been growing at 25% annually for the past three years. If the company maintains that pace, it’s a solid investment at the current price. Even if earnings growth falls back to its 10-year average of 10% annually, it still appears lucrative given zero debt, steady quarterly dividend and decent book value.