Psychemedics Corp Stock Valuation – February 2016 $PMD

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – February 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Psychemedics Corp (PMD) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Psychemedics Corporation (Psychemedics) provides testing services for the detection of drugs of abuse through the analysis of hair samples. The Company’s testing methods utilize a technology that digests the hair and releases drugs trapped in the hair without destroying the drugs. The Company’s primary application of its technology is as a testing service that analyzes hair samples for the presence of certain drugs of abuse. The Company performs a custom-designed enzyme immunoassay (EIA) on the liquid supernatant, with confirmation testing by mass spectrometry. Psychemedics provides screening and confirmation by mass spectrometry using various practices for cocaine, marijuana, phencyclidine (PCP), amphetamines, including ecstasy, and opiates, including heroin, hydrocodone, hydromorphone, oxycodone and codeine. The Company also offers a test for alcohol using hair, which measures average alcohol consumption over a period of approximately three months.


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Downloadable PDF version of this valuation:

ModernGraham Valuation of PMD

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $65,671,029 Fail
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.37 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -32.16% Fail
6. Moderate PEmg Ratio PEmg < 20 26.99 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 5.28 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.37 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.87 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

Stage 2: Determination of Intrinsic Value

PMD value chart February 2016

EPSmg $0.42
MG Growth Estimate -3.39%
MG Value $0.72
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $6.12
MG Value based on 0% Growth $3.59
Market Implied Growth Rate 9.25%
Current Price $11.39
% of Intrinsic Value 1573.65%

Psychemedics Corp. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, insufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor is only concerned with the lack of earnings growth over the last five years. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $0.55 in 2012 to an estimated $0.42 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 9.25% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price. Psychemedics Corp. receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

PMD charts February 2016

Net Current Asset Value (NCAV) -$0.41
Graham Number $3.68
PEmg 26.99
Current Ratio 2.37
PB Ratio 5.28
Dividend Yield 5.27%
Number of Consecutive Years of Dividend Growth 0


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Most Recent Balance Sheet Figures

Balance Sheet Information Dec2015
Total Current Assets $8,456,000
Total Current Liabilities $3,565,000
Long-Term Debt $4,272,000
Total Assets $22,363,000
Intangible Assets $0
Total Liabilities $10,689,000
Shares Outstanding (Diluted Average) 5,412,000

Earnings Per Share History

Next Fiscal Year Estimate $0.28
Dec2015 $0.28
Dec2014 $0.60
Dec2013 $0.72
Dec2012 $0.57
Dec2011 $0.67
Dec2010 $0.50
Dec2009 $0.29
Dec2008 $0.57
Dec2007 $0.85
Dec2006 $0.94
Dec2005 $0.78
Dec2004 $0.54
Dec2003 $0.23
Dec2002 $0.24
Dec2001 $0.04
Dec2000 $0.32
Dec1999 $0.44
Dec1998 $0.44
Dec1997 $0.44
Dec1996 $0.44

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $0.42
Dec2015 $0.52
Dec2014 $0.63
Dec2013 $0.61
Dec2012 $0.55
Dec2011 $0.55
Dec2010 $0.53
Dec2009 $0.60
Dec2008 $0.74
Dec2007 $0.78
Dec2006 $0.68
Dec2005 $0.48
Dec2004 $0.32
Dec2003 $0.22
Dec2002 $0.24
Dec2001 $0.27
Dec2000 $0.40

Recommended Reading:

Other ModernGraham posts about the company

Psychemedics Corporation Valuation – November 2015 Update $PMD
Psychemedics Corporation Analysis – August 2015 Update $PMD
21 Companies in the Spotlight This Week – 5/9/15
Psychemedics Corporation Quarterly Valuation – May 2015 $PMD
Psychemedics Corporation Quarterly Valuation – January 2015 $PMD

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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