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  • Small Stock, Moderate Growth, Big Dividend, Huge End Market 0 comments
    Feb 13, 2013 11:38 AM | about stocks: HSKA

    What do nearly 62% of all U.S. households own, that's usually acquired free of charge, but often costs $600 to $900 each year? The answer - pets - and it's an industry that's only growing.

    Analysts expect that U.S. households will spend some $56.5 billion per year on their pets by the end of next year, growing at a compound rate of about 4% per year. These figures are likely to continue growth, as a recent American Pet Products Association (APPA) 2011-2012 survey found that the number of households owning bets increased 2.1% to an all-time high of 72.9 million.

    Of course, investors haven't been oblivious to these trends, with publicly traded companies like PetSmart Inc. (NASDAQ:PETM) jumping more than 180% over the past five years, easily outperforming the S&P 500's dismal 8.5% return over the same timeframe. But, investors searching for the best opportunities may want to seek out potentially undervalued plays in the space.

    Small and Growing Stock

    Heska Corporation (NASDAQ:HSKA), a developer of veterinary products ranging from single-use diagnostic tests to pharmaceuticals, is a relatively unknown industry player with a modest $47 million market capitalization. But, most investors are surprised to see that the small company boasts a large 4.5% dividend yield that it recently began paying in March of 2012.

    During the third quarter of 2012, the company reported revenues that dipped 4% to $16.9 million due to lower sales of heartworm diagnostic tests, lower international cattle product sales, and lower sales under a contract with AgriLabs. However, the firm indicated that it still expects 2012 revenues to increase as compared to 2011, providing a vote of confidence.

    Gross margins also improved last quarter from 39.8% to 38.8%, thanks to a shift in product mix to relatively higher margin products, including a greater mix of high margin instrument consumables. Moving forward, the company expects these gross margins to also improve in 2012 as compared to 2011 financial results, making ongoing pricing power.

    Undervalued with a Dividend

    Perhaps more importantly, Heska's balance sheet reflects a potentially undervalued opportunity, with stockholders' equity of $48.37 million that exceeds its market capitalization and profitable operations generating stable cash flow. Investors can therefore acquire the stock at a discount to its intrinsic valuation, much less its potential growth opportunities ahead.

    When it comes to dividends, a quick look at the cash flow statement shows that they cost only $536,000 during the nine months ended September 30, 2012, suggesting that its $5.7 million in cash and positive cash flow can easily sustain the payments. Such efforts to return capital to shareholders should help improve the stock's valuation over time.

    The only potential roadblock over the long-term would be declining net income - a fear stoked by a projected decline in net income in 2012 versus 2011. But upon closer inspection, the company's bottom line is only lower due to higher selling and marketing expenses associated with growing sales force personnel that could help enhance long-term revenues.

    Other Important Considerations

    Heska appears to be an attractive investment opportunity in a growing industry, particularly with its 4.5% dividend yield and high shareholders' equity. While 2012's financial results may prove somewhat disappointing on the bottom line, most of these hits to the bottom line came from higher marketing expenses associated with the hiring of sales personnel.

    However, investors should be aware that the company's stock has a market capitalization of under $50 million, making it a micro cap stock. With average daily volume of just 9,138 shares, investors may find the stock less liquid than large cap stocks. The lower liquidity may inhibit investors' ability to buy and sell the stock at the desired time and price.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Themes: Pets, Medicine, PETM Stocks: HSKA
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