Monday, March 22, 2010

VPS, HSKA, KAZ Three Penny Stocks

Listed in this report are three penny stocks with interesting business models. Some of the companies are facing difficulties and could be a good value play. The three companies are VPS a snack food and bottled water distributor, HSKA a pet medical manufacturer and distributor and KAZ a oil and natural gas exploration company.

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Vermont Pure Holdings, Ltd (VPS)
Current price: 0.74
Market cap: 15.89M

Vermont Pure operates in New England, New York and New Jersey delivering bottled water, coffee, ancillary products and other office refreshments such as soft drinks and snacks using their own distribution trucks. Vermont Pure's second leading product in its product mix is coffee which accounted for 24% of their sales volume in 2009.

Future Outlook
With rising threats from home and office filtration products Vermont Pure acquired  a small firm in 2009 to help develop their plumbed-in filtration. It's safe to say for the short run demand for coffee, water and snacks for offices will remain stable. For the coffee market Vermont faces many competitive challenges as the industry is rapidly changing and evolving. My main concern is the ability for the company to generate cash flow to pay off debt. The company is highly leveraged with debt, 72% of its assets are liabilities.

This is from the company's 2009 annual report:
"If we do not repay our indebtedness in a timely fashion, our secured creditors could declare a default and foreclose upon our assets, which would likely result in harmful disruption to our business, the sale of assets for less than their fully realizable value, and possible bankruptcy."

Heska Corporation (HSKA)
Current price: 0.89
Market cap: 46.42M

Heska is a developer, manufacturer and distributor of veterinary products. The company makes various tests for detecting heartworm in dogs and cats, allergies, thyroid supplements, feline respiratory disease vaccines, and nutritional supplements.Heska has the only one step test for detecting heartworm in cats and dogs.

Heska released guidance for 2010 stating it anticipates slightly better revenue and net income from 2009. With an aging average pet age and increasing pet population Heska is well positioned to meet new demand but faces competitive challenges from generic drugs. The company has around $162 million it can use in the future to offset income, from previous losses. This will be beneficial for tax savings and Heska can use this saved money to invest and expand or pay back shareholders. 

Heska has a strong balance sheet which is something I like to see in penny stocks. Their latest quarter current ratio was 2.02 and the company's capital structure is 70% equity which means less interest rate expense but more polluted earnings.

BMB Munai (KAZ)
Current price: 0.99
Market cap: 51.61M

BMB Munai operates under its wholly owned subsidiary Emir Oil. The company is engaged in the exploration, development, and production of crude oil and natural gas. The Aksaz, Dolinnoe, and Emir oil and gas fields in western Kazakhstan serve as the primary areas for exploration and development. It transports oil and gas via rail, barge, and pipeline through Russian territory (Morningstar).

Some things that jumped out at me while reading KAZ's latest quarter results was the fact that the current extraction tax rate is 5%, this rate will increase to 6% in 2012 and then 7% in 2013.
Some complaints/concerns I came across was the fact that the company will not be able to pay a $60 million debt maturity July 2010. Although the company does not have the cash on hand or liquid assets to make the payment the company could issue more debt, or more likely equity. In this case the stock will be even more diluted. KAZ is already funded with 70% equity which is uncommon for companies as it eats into shareholder returns. If the company can work out its debt problems and generate some free cash flow it could be a great investment. The company is trading at 0.3 P/B compared to its five year average of 1.3 and a P/S of 1.0 compared to 14.6 for its five year average

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  2. I just looked over GETA real quick and it seems like a speculative investment, I try to stay away from those because its pretty much a gamble either way.

    If you are a health care expert and can decided whether or not the products have a chance of being successful you might be more comfortable investing in it. But a health care expert I am not I just look at the income statement, balance sheet and cash flow statements all of which are pretty weak.

  3. Thanks John, I'm not a health care expert, and the statements look weak, but there was a lot of buzz around it this month...I think that's why its been going up a bit..typical emotional buys

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  6. Can I ask what you think of CPTC?