Pharma-Bio Serv: 62% Upside Based On Last Earnings Results Alone

| About: Pharma-Bio Serv, (PBSV)

Normally when one of my stocks reports its earnings results after hours on a Friday, I cringe in anticipation of a bad report. Normally Friday after hours is a time slot reserved for companies who have disappointing results to deliver and wish to stay off radar. Naturally, when I got the alert on a Friday afternoon that Pharma-Bio Serv (OTCQB:PBSV) had just reported its earnings results, I had one eye shut when opening the press release, fearing what would be inside.

Much to my pleasant surprise, PBSV had broken the Friday after close tradition and delivered an outstanding earnings report. Record sales, record pre-tax income, and record cash levels suggest reversed a previous three-quarter trend of sequentially declining net income. Based on Friday's close, PBSV now trades at an annualized PE ratio of under 7 and trades at around two times shareholder equity per share, which consists of mostly cash and receivables with a small amount of liabilities. It has a current ratio of almost 7.

Pharma-Bio Serv Is A Picks And Shovels Play Of The Biotech Gold Rush

Pharma-Bio Serv is a global compliance and validation services consulting solutions provider, headquartered in Puerto Rico, with operations in the U.S., Ireland and Spain. Pharma-Bio Serv's core business is FDA and international agencies regulatory compliance related services with integrated portfolio services including microbiological and chemical testing services for clients in the Pharmaceutical, Biotechnology, Chemical, Medical Device, Cosmetic, Food and Allied Products industries, at its laboratory testing facility in Puerto Rico. Services also include "Integratek," an information technology consulting practice and "Pharma Serv Academy," a division that provides technical and regulatory standards seminars/training conducted by industry experts. The company's global team includes more than 275 leading engineering and life science professionals, quality assurance managers and directors.

Pharma-Bio Serv has a well-established and consistent relationship with the major pharmaceutical, biotechnology, medical device and chemical manufacturing companies in Puerto Rico and the United States, which provides it access to affiliated companies in other markets. It seeks opportunities in markets that could yield profitable margins using its professional consulting force and also provides services such as those performed by its microbiological testing laboratory facility, its information technology service division, Integratek, and its technical training division, Pharma Serv Academy.

What I Think Will Drive PBSV Higher

PBSV clearly has the sales, earnings and cash to demand a much higher share price, possibly 62% higher than Friday's close. A 62% gain over Friday's close would bring the share price to $2.45 per share. With annualized earnings of .24 per share as of this last reported quarter, that would be a PE just over 10. That is a fair, possibly still undervalued PE ratio, considering the growth PBSV has experienced and the potential growth ahead of it. The CEO implied in her remarks that more growth will be coming:

Our growth is a testament to our ability to continue to expand our US market base and increase our Lab services business

There was an interesting amended 13D filing by San Juan Holdings, Inc. A dividend or some other item to enhance shareholder value may be in the future:

Subject to ongoing evaluation and analysis, the Reporting Person may consider certain plans or proposals to increase shareholders' value that may relate to or may result in (NYSE:I) a change in the present board of directors or management of the Issuer, including any plans or proposals to change the number or term of directors or to fill any existing vacancies on the board; and/or (ii) a material change in the present dividend policy of the Issuer

Up until February 25 of this year, PBSV never issued any press releases and instead only filed its earnings reports with the SEC. On February 25 it issued its first press release announcing its new investor relations firm. This suggests it's ready to get out the story (and that fundamentals will continue to improve):

CorProminence is well suited to assist Pharma-Bio Serv, and effectively communicate their business and growth strategy to raise awareness of the Company within the investment community. We look forward to working with the team at Pharma-Bio Serv to help achieve their goals

Risks

1. From the 10Q filing:

The government of Puerto Rico is currently debating significant reforms to the Puerto Rico tax code. Under the legislation as currently proposed, the business to business ("B2B") sales tax exemption on services may be eliminated and these services may be taxed. While there is considerable uncertainty as to the final outcome of the proposed tax reform, these new laws, if passed, could have a material adverse effect on our business, results of operations, financial position, and cash flows.

2. If the biotech industry were to soften especially in a weak economy or stock market where funding becomes more scarce, it could hurt the spending power of PBSV's customers and consequently hurt PBSV.

3. A large portion of PBSV's revenues have come from a handful of customers. If PBSV were to lose one or more of these customers and not find replacement business, it would negatively affect its financial results.

Overall, I believe the potential rewards greatly outweigh the potential risk near, short, and long term and PBSV is a buy at the current levels. I believe its earnings, cash flow, growth, balance sheet, possible dividends, and desire to bring market awareness makes its current stock price of $1.51 a compelling investment. Good luck to all PBSV stakeholders.

Disclosure: I am long OTCQB:PBSV. 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.