Female Health Can Be A Very Profitable Investment For The Long Term

Jul.23.13 | About: The Female (FHCO)

The Female Health Company (NASDAQ:FHCO) has excellent prospects for future growth. The company is fairly small in size and has been unprofitable for a major part of its history. However, now its profits are rising at a rapid pace. The company has no long-term debt and a relatively sturdy cash position. Due to the company's monopoly in its product category, the company has a huge edge in the market.

Profile

The Female Health Company manufactures and sells female condoms, under the brand name, FC2. The FC2 condom is currently available in 138 countries. The company is the only female condoms manufacturer that has received approval from the FDA. In addition to the FDA, other regulatory agencies in the European Union, India and Brazil have approved the FC2 female condom. A large portion of the company's products is sold to global public health sector agencies, and ministries of health.

Competition

The company competes with manufacturers of both male and female contraceptives. Male condoms are generally cheaper than their female counterparts, and are manufactured by companies that have significantly larger resources than does Female Health. Women, and men, report several advantages of using female condoms over male condoms.

The greatest advantage provided to a user of this product is related to timing. The female condom can be 'put on' hours before intercourse, and can override any adverse judgments made by men regarding the use of male contraceptives. This gives a woman more power over the sequence of events. It prevents unwanted pregnancies and the risk of contracting sexually transmitted infections. But mostly, it divides the decision making power between the man and the woman; With male contraceptives, the man has veto power over the likes and dislikes of their female partners. In addition, for a man, the female condom is less constricting than is a male condom. This allows for a better experience.

Another competitive advantage with the company is the use of better material. Male condoms are made from latex and cause irritation for some people. Here's a quote:

"FC2's primary raw material (a nitrile polymer) offers a number of benefits over natural rubber latex, the raw material most commonly used in male condoms. FC2's nitrile polymer is stronger than latex, reducing the probability that the female condom sheath will tear during use. Unlike latex, FC2's nitrile polymer quickly transfers heat. FC2 warms to body temperature immediately upon insertion which may enhance the user's sensation and pleasure. FC2 is also an alternative to latex sensitive users (7% to 20% of the population) who are unable to use male condoms without irritation. To the Company's knowledge, there is no reported allergy to the nitrile polymer."

Several large companies distribute male condoms in the US. A majority of those are sold by Church & Dwight. They sell their product under the 'Trojan' brand. Another popular brand in the male condoms category is 'Durex'. Durex is sold by Reckitt Benckiser Plc. Both of these companies have much larger resources and market shares than Female Health. In addition, the lower cost of male condoms serves as a major advantage for the male condoms producers. For instance, the FC2 condom costs $2.02 per piece on Amazon, as opposed to the 50 cents for a Trojan condom. However, it is important to note that the female condom provides certain unique benefits that may justify the higher price, for some people. In addition, the current make up of the customers at Female health leans towards government agencies, which may look at factors other than price.

In the female condoms category, Female Health is the clear leader since it is the only female condoms producer that has obtained FDA approval for its products. Other important manufacturers of the female condom are Cupid Ltd.(BSE: CUPID), and Medtech Products Ltd. Both these companies are based in India. Female Health benefits from a head start in the industry; The FC2 condom is sold in 138 countries in the world. Most other companies sell their products in far fewer. For instance, Cupid Ltd sells in less than 20 countries. Although, these companies could obtain FDA approval in the future, the early advantage with Female Health would be hard to counterweight.

Key differences between FC2 and the Cupid Female Condom:

The FC2 is made of a nitrile polymer, while the Cupid female condom is made of latex. As mentioned above, a significant portion of the population is sensitive to latex, which deters them using any male condoms and some female condoms, such as Cupid's. This gives the FC2 a huge advantage over the Cupid condom. Even if Cupid Ltd. replaces the latex with a synthetic substance, the initial loss of momentum and reputation may prove costly.

The Cupid condom sells for much less than the FC2. While the FC2 sells for around $2 a piece, the Cupid female condom is available for less than half that amount. Although this is a huge price advantage, the limited availability, the use of latex, and lower recognition in the market hurt Cupid, while justifying the higher price for FC2.

The revenues at Cupid Ltd were around $5 million for 2012, compared with the $35 million for the Female Health Company. in addition, the profit margin at Cupid is much lower, at 2.7%, compared with 43% for FC2.

Financials

Based on the last 10k, the Female Health Company enjoyed a high current ratio of 2.87. The current ratio was even higher a year earlier, at 4.25. Clearly, the company has done a good job of maintaining its cash reserves. It is unlikely the company would suffer any liquidity shortages in the near future.

In addition, the company has no long term debt. This makes the company an even safer bet. Long term investors prefer to purchase companies that reduce financial risk and prepare for the bad times. Female Health has certainly done that.

The company also has a very impressive earnings growth record. The turnaround in the net earnings over the last decade seems very tangible and sustainable. The company has clearly turned a corner and is now actively leveraging its strengths. For instance, the EPS is up 52 times since 2006. Due to the company's inherent competitive advantages and monopoly in the market, high future growth seems very likely.

Stock Price:

The company has a humble PE ratio of 14.26. This is lower than the S&P 500 PE ratio of 19.43. Since the company sells most of its products to global public health sector organizations, its revenues are a function of public health programs. This has increased its sensitivity to volatility in the frequency of such health initiatives. This makes prediction of the company's future revenues difficult. Although the company's fundamentals are noteworthy, the lack of reliability in sales makes the stock slightly risky in the short term .

Risks:

The biggest risk faced by Female Health is a shift in the priorities of the public health organizations. Any adverse reassessment of the quality of the company's products, or a shift in focus from family planning and/or sexually transmitted infections would seriously harm Female Health's prospects. Another short term risk to the company's growth is the FDA's approval of other similar products made by other companies.

Conclusion:

The Female Health Company is one of the most profitable companies in the market. The company faces no direct competition in the US for its products since it is the only company with FDA approval. This advantage, although not permanent, has allowed the company to fortify its brand and set a healthy foundation for the future. Due to its small size, and an underpenetrated market, the company should have wonderful prospects.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.