Psychemedics: 13 Million Truck Drivers Forced To Undergo Hair Testing

| About: Psychemedics Corporation (PMD)

Summary

The expansion into Brazil appeared to be a tremendous growth opportunity for PMD.

Unfortunately, the legislation which served as the catalyst for this growth was deferred.

Finally, this legislation is being implemented, and I may have underestimated its impact.

Recent weakness creates a great entry point to profit from the forced testing of Brazil drivers.

I have liked Psychemedics Corp. (NASDAQ:PMD) for several years now, but believe the company is now finally on the cusp of significant earnings growth. Psychemedics is a small-cap company, just $72 million in market cap that has invested over $6 million into an additional laboratory in Brazil. It did so because the government passed legislation that forces truck drivers to get tested for drugs by hair test. The government was highly incentivized to pass and uphold this legislation because Brazil has a terrible death rate for truck drivers. Likely in part caused by drug use in order to stay awake on what are often extremely long-distance hauls.

Once the legislation got passed but deferred, the stock sold off quite a bit. Since the beginning of March, it is finally being implemented, and I understand from the Brazilian media that the test costs $100, it should be paid for by the trucking company instead of the driver and the legislation affects 13 million drivers. Both the cost of the test and the number of drivers exceed my initial projections by two times. The number of drivers affected even exceeds my projection by three times. They will be required to take the test every five years. When discussing this idea as part of my Off The Beaten Path research, I estimated PMD could add between $18 and $33 million in revenue if it grabbed 50% market share in Brazil. That's on a current revenue base of $26 million. Given the numbers now surfacing, I believe my estimate to be highly conservative.

PMD has only a ~1% market share in the general market of drug tests. It is a leader in hair testing, there are very few (or no competitors) with the capability present in Brazil and the company has had a sales division in the country for 15 years, but recently expanded its presence with a full-scale lab. The lab gives it a cost advantage to providers who will have to send the samples to the U.S. and back in order to test them. For that reason, it makes sense the company is well positioned to acquire a significant market share in Brazil. Although the stock did run up YTD, the recent weakness appears to offer a timely and advantageous entry point to profit from the Brazil expansion.

Disclosure: I am/we are long PMD.

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.

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