Submitted by David Gould through our Trefis contributor tool
RECOMMENDATION: Reiterate “STRONG BUY”
MINIMUM PT: $1.01, 58% upside
Just yesterday, Gould Partners urged investor to aggressively buy shares in Pressure BioSciences (PBIO). This bullish call was reiterated by other analysts and now, in our view, confirmed by favorable business momentum.
The developer of lab sample equipment recently entered into a JV agreement with Sage-N Research to create software for Pressure BioSciences’ innovative pressure cycling technology (PCT). This news comes off of two other favorable announcements, namely that (1) the company is ramping up its distributors and (2) partnering with the Henry C. Lee Institute of Forensic Sciences to evaluate PCT. We view (2) as putting the company into play, since, around 3 weeks ago, Abbott Labs (ABT) entered into an agreement with the Univerisity of North Texas Science Center to evaluate a forensic solution. Scientists at the University of North Texas and Florida International University have already expressed how PCT has helped them improve DNA yields. And more than 100 independent publications have backed this positive consensus.
As Pressure BioSciences begins to aggressively commercialize operations through increasing marketing staff, international distributors, and partnerships, it is well positioned to surge in value. A discounted cash flow analysis of the stock demonstrates that Pressure BioSciences is on the verge of heading skyward. It is only a matter of time before investors pick up on the fundamentals.
The company finished 2010 with $1.34M in revenue. In the second half of 2011, the top-line spiked 66% off of the first half. Fourth quarter consumable sales were up 77% sequentially. Despite these impressive figures, for the sake of being safe, Gould Partners conservatively models a 12.8% per annum growth rate in revenue over the next six years. This projection is in-line with consensus expectations for peer company Thermo Fisher Scientific Inc (TMO). But, since Thermo Fisher has a much larger base to grow off of, our projection significantly understates the PBIO’s potential.
Cost of goods sold have also fallen drastically over the last reported three years: from 47.1% of revenue in 2008 to 28.4% in 2010. We expect this figure to trend from 25% to 20% over the next six years as R&D hovers around 6% to 1%, and SG&A holds steady at 27%.
We then factor in taxes, net increases in working capital, and debt while adjusting for depreciation. Taking a perpetual growth rate of 2.5% and discounting backwards by an overly high rate of 15%, our bearish price target for PBIO is $1.01. This implies 58% upside. As noted above, this calculation is overly reserved on revenue projections and the discount rate. Reason thus calls for a “strong buy” recommendation.
With the stock trading 10% book value, we believe firms like Abbott and Thermo Fisher are most likely considering a takeover. Pressure BioSciences already has over 150 customers under its belt, demonstrated the efficacy of its products, and proven supportive demand. Access to a wider client base would significantly catalyze revenue. If an outright buyout does not emerge, we anticipate the firm to receive multiple partnership requests. It should be noted that these partnerships could, in turn, develop into an acquisition.
With $910K capital backing from leading federal agencies (ie. NIH and DoD) in 2011, a strong IP profile, critical diversification in three different markets (ie. mass spectrometry, forensics, histology), and industry acclaim, PBIO may very well be the hottest stock of 2012. This is a company that, again, we see, at a minimum, yielding double-digit returns. When the Street picks up on all of this (and we hope to alert professionals), understand that this stock is heading up.
DISCLOSURE: The distributor of this research report, Gould Partners, is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence as information contained within this report has been derived from public sources and cannot be guaranteed by us to be fully accurate. We are a consultant to a third-party EAG, representing Pressure BioSciences and have received one thousand dollars for independent research. Always discuss investments with a licensed professional before making any financial decision. Statements made herein are often “forward-looking statements” as stipulated under Section 27A of the Securities Act of 1933, Section 21E of the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. Since these statements are uncertain, actual results may be materially different from those expected.