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ModernGraham Valuation: Psychemedics Corp (PMD)

moneyCompany Profile (obtained from Google Finance): Psychemedics Corporation provides testing services for the detection of abused substances through the analysis of hair samples. The Company’s testing methods utilize a technology to enzymatically dissolve hair samples and then perform radioimmunoyassays on the hair sampled, with confirmation testing by mass spectrometry. Its primary application of its technology is as a testing service that analyzes hair samples for the presence of certain drugs of abuse. Its tests provide quantitative information that can indicate the approximate amount of drug ingested, as well as historical data, which can show a pattern of individual drug use over a longer period of time providing superior detection compared to other types of drug testing. It provides commercial testing and confirmation by mass spectrometry using industry-accepted practices for cocaine, marijuana, phencyclidine (PCP), methamphetamine and opiates. Testing services are performed at its laboratory in Culver City, California.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – FAIL
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $4.29
MG Opinion Overvalued
Value Based on 3% Growth $8.34
Value Based on 0% Growth $4.89
Market Implied Growth Rate 8.39%
NCAV $1.24
PEmg 25.27
Current Ratio 4.36
PB Ratio 6.38

Balance Sheet – 9/30/2013 

Current Assets $9,600,000
Current Liabilities $2,200,000
Total Debt $0
Total Assets $15,100,000
Intangible Assets $0
Total Liabilities $3,000,000
Outstanding Shares 5,310,000

Earnings Per Share

2013 (estimate) $0.61
2012 $0.57
2011 $0.67
2010 $0.50
2009 $0.29
2008 $0.57
2007 $0.85
2006 $0.94
2005 $0.78
2004 $0.54
2003 $0.23
2002 $0.24

Earnings Per Share – Modern Graham 

2013 (estimate) $0.58
2012 $0.55
2011 $0.55
2010 $0.53
2009 $0.60
2008 $0.74

Conclusion:

Psychemedics Corporation is a company to keep an eye on as its financial position is extremely strong but it has not developed the level of growth necessary to make it undervalued.  The company is not suitable for the Defensive Investor due to its small size, lack of growth, and high PEmg and PB ratios.  However, it is suitable for the Enterprising Investor after only failing the growth requirement.  As of now, the valuation is not strong as EPSmg have shrunk from $0.74 in 2008 to an estimated $0.58 for 2013.  Such change in EPSmg does not support the market’s implied growth estimate of 8.39%, and as a result the company would appear to be overvalued.  Going forward, Enterprising Investors should keep Psychemedics Corp on a watch list to see if the company improves in value, and in the meantime should check out some Undervalued Companies we reviewed on Seeking Alpha last weekend.

What do you think?  Do you agree that Psychemedics Corp is overvalued?  What would be your assessment?  Is the company suitable only for Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Psychemedics Corp (PMD) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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