Psychemedics: Market Is Underestimating The Significance Of Brazil Legislation


  • 6.8 million Professional Brasil drivers need to take a mandatory drug hair test from July 2014, every 5 years.
  • The company already has a strong partner in Psychemedics Brasil on the ground.
  • The company could very well increase revenue by 20%-60% after July.

Psychemedics Corp. (NASDAQ:PMD) trades at a P/E of 22, its earnings have been growing a little below 10% on average over the past 10 years. Over the past 3 years, earnings have been growing at 25% per year. None of this is that remarkable, except that the company did so while maintaining an average payout ratio of 89%. A testament to the success of its asset-light business model.

The balance sheet is strong, with $ 3.97 million in cash as of March 31, 2013 and just $6 million in debt at LIBOR 2%+. PMD pays a quarterly dividend (which it paid 69 times in a row). Total annual dividend yield is 3.6%. This is not a management you need to fear will allocate capital to subpar investments. Over the past 10 years, the company averaged a payout ratio of 89%.

In my 2013 article on PMD I quoted Raymond C. Kubacki (CEO) from the 2013 news release:

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.

Revenue did grow since, and the company's operating margin did indeed expand.

PMD Total Return Price data by YCharts

In addition to the stock having performed quite well since my initial article, there is a key development, that is not necessarily recognized as such by the market, that has been announced in December 2013 by press release:

The Company noted that the Brazilian Federal Government had announced new guidelines that will require professional drivers in the transportation industry to pass a hair drug test when obtaining or

This article was written by

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Special-Situation And Event-Driven Ideas To Improve Risk Adjusted Returns
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