Psychemedics Corp: Splitting Hairs For Profit

Psychemedics Corporation (NASDAQ:PMD) is the world's largest provider of hair testing for the detection of drugs of abuse. The Company's patented process is used by thousands of U.S. and international clients, including over 10% of the Fortune 500 companies, for pre-employment and random drug testing. Major police departments, Federal Reserve Banks, schools, and other public entities also rely on its unique patented drug testing process.

The company strongly believes their drug testing method to be superior to any other product currently in use, including traditional urine testing and other hair testing methods.

PMD data by YCharts

PMD trades at a P/E of 19.81, its earnings have been growing a little below 10% on average over the past 10 years. However, over the past 3 years earnings have been growing at 25% per year.

In 2010 and 2011 and 2012 there have been capital expenditures of 1, 1 and 2 million. In the years 2003 - 2009 there were none. On a net income of 3 million this has been a significant drag in recent years.

The balance sheet is strong with $ 2.5 million in cash as of march 31, 2013 and no long term debt. Despite their recent heavy investments in new equipment and software.

Book value is around $2/share, about $0.50 of which is cash.

PMD pays a quarterly dividend (which they paid 67 times in a row). Total annual dividend stands around 5%.

Raymond C. Kubacki (CEO) states in their latest 2013 news release:

"Our investment in sales and marketing continues to pay off as our new business growth accounted for the entire gain in the quarter, as well as offsetting the decline in our base business due to the weak hiring/jobs environment."

"During the quarter, we also completed the majority of the transition to our new patented screening process. While we are expecting many benefits from this new patented technology, including an increase in capacity, the ability to expedite new tests to market, and reduced operating costs, there was a negative impact on profits for the quarter."

Over the last 12 months insiders have increased their ownership in the company by +55% and key insiders now own a total of 5.3% of shares outstanding.

Conclusion

If the company continues to grow earnings at 25% annually, it's a steal at the current price. Capital expenditures have been unusually high given the financial history of the company, if these come down this can have a significant impact on earnings.

If the company falls back to its 10 year average growth rate, it's less of a steal. Although the price still seems fair, given their quarterly dividend, which they paid out for 67 quarters in a row, no long term debt and a few dollars of book value. At $11.21/share this company looks like it's a decent investment.

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.