Our Psychemedics Stock Prediction in 2019 (Buy or Sell?)
The exploding marijuana industry is rife with indirect plays that could be safer bets on growth because they’re involved in non-cannabis niches as well. One such stock is Psychemedics (NSDQ: PMD), a drug-testing firm. Unlike many direct marijuana opportunities, this firm is generating real revenue and profits.
The question is how far of a growth runway does Psychemedics enjoy?
Our Psychemedics stock prediction will answer that question and take a look at the pros and cons of the company. Let’s see what 2019 is likely to bring for PMD.
What Is Psychemedics?
To make a PMD stock prediction, we first must understand what this company does.
Drug testing. That’s right, Psychemedics is a firm that’s as nosy as it gets. But there’s one thing the company does differently than most: it uses hair samples.
Psychemedics’ technology allows it to determine the approximate amount a drug has been ingested, as well as historical data, which can show a pattern of individual drug use over a period of time. Not only does it determine if there are drugs in someone’s system, but whether the person tested is a frequent user.
With a market cap of $92.2 million, Psychemedics uses a process known as mass spectrometry to determine usage of PCP, marijuana, cocaine, synthetic cannabinoids, opiates, hydrocodone, oxycodone, and codeine. It can detect recreational drugs as well as prescription meds.
The company serves employers, law enforcement, treatment professionals, schools and, yes, parents.
The company has generated real revenue. PMD posted revenue of $29 million in FY14, $27 million in FY15, leapt up to $39 million in FY16, gained modestly to $39.7 million FY17, and slowed back down to $42.5 million in the past year.
But wait, the news gets even better. Many marijuana companies post fast revenue growth but still manage to lose money. Psychemedics, on the other hand, has been regularly turning a profit. The firm posted $3.2 million in net income in FY14, which grew to $6.1 million in the past year.
Psychemedics also posted positive operational cash flow and free cash flow over the past year, $6 million and $4.6 million, respectively.
How Has Psychemedics Stock Performed?
- Over the past year, PMD shares have lost 14% whereas the S&P 500 has lost 6%.
- Over the past two years, PMD shares have lost 27% whereas the S&P 500 has gained 14%.
- Over the past five years, PMD shares have gained 14% and the S&P 500 has gained 41%.
How Has Psychemedics Stock Performed in 2017/2018?
- In 2017, Psychemedics shares lost 14% whereas the S&P 500 gained 19%.
- In 2018, Psychemedics shares lost 14% whereas the S&P 500 lost 6%.
Who Are Psychemedics Rivals?
To assess Psychemedics’ prospects, we must look at its competitors. Many marijuana companies are destined to crash and burn.
However, the diagnostics companies that constitute PMD’s main rivals are all on a solid footing.
Quest Diagnostics (NYSE: DGX)
Quest Diagnostics offers a massive array of diagnostic testing information to employers of all stripes, but also to hospitals, doctors, patients, clinicians, and health plans.
Quest offers diagnostic solutions for risk assessment services for the life insurance industry, and health information technology solutions for health care organizations and clinicians. Quest also does hair testing. Quest boasts a market cap of $11.5 billion.
Laboratory Corporation of America (NYSE: LH)
Lab Corp is the largest diagnostician in the country. It also offers a range of drug and other diagnostic tests, including hair. Its testing is highly specialized.
Lab Corp offers drug development solutions and lab testing services to help companies that are developing new therapies. Lab Corp (market cap: $13.5 billion) is a juggernaut in the industry.
OraSure Technologies (NSDQ: OSUR)
This diagnostic company (market cap: $725 million) conducts standard screening and provides medical devices for the removal of benign skin lesions by cryosurgery or freezing, immunoassay tests and reagents for insurance risk assessment, and forensic toxicology applications.
Will Psychemedics Corporation Stock Go Up in 2019 (Should You Buy?)
The marijuana industry is undeniably a vast investment opportunity, for direct cannabis plays or diagnostic firms such as Psychemedics. This video helps explain why:
Psychemedics certainly has its work cut out for it. It’s entering a very competitive space with companies that are much larger.
However, the company holds a patented technology that places it above its peers.
The firm’s 10-K states:
The company’s testing methods utilize a patented technology that digests the hair and releases drugs trapped in the hair without destroying the drugs. This is fundamental to the entire process because the patented method gets virtually 100% of the drug out of the hair, and if you cannot get the drug out of the hair, you cannot measure it.
This is the first element of the company’s process that appears critical to its future success. Certainly, the technology is impressing clients considering its ability to generate $40 million in revenue last year.
However, there is a second step in this process:
The company then performs a proprietary custom-designed enzyme immunoassay (EIA) on the liquid supernatant…[which] differ from the more commonly used immunoassay procedures employed to test urine samples. The 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.
Most of the other companies that do hair sampling claim that their processes do roughly the same thing. Nevertheless, the company has real revenue and has generated net income several years in a row.
Psychemedics’ three competitors have net margins of about 10%. That means net income is about 10% of total revenue. Psychemedics’ net margins are closer to 15%. That’s astonishing.
The company trades at about 2.5x revenue. Quest trades at 1.6x. Lab Corp trades at about 1.2x. OraSure trades at about 4x revenue.
Psychemedics trades at 16x earnings. OraSure trades at 41x. Quest trades at 13.5x. Lab Corp trades at about 10x.
We feel Psychemedics is underpriced on a multiple–of–revenue basis. OraSure seems to have a premium valuation that it may well deserve, but the fact that Psychemedics is not priced much higher than its considerably larger competitors also weighs in its favor.
Will Psychemedics Go Down in 2019 (Should You Sell?)
Psychemedics is trading at $18.30 and be forewarned: it’s a microcap. Many companies fail at this level of valuation.
One of the challenges about a microcap stock is that revenue and earnings have trouble gaining traction.
In fact, for Psychemedics over the last couple of years, revenue has flattened out.
With flat revenue comes flat earnings. So while $40 million in revenue and $6 million in net income are impressive for a company at this stage, the fact that growth seems to have stalled means that its valuation metrics must be heavily discounted.
Remember, we prefer companies with growing earnings, which in turn bestows a higher multiple. A company whose earnings are flat deserves a much lower multiple.
Using that criteria, there is certainly an argument to be made that the stock is expensive and overpriced.
Overall Psychemedics Forecast and Prediction for 2019
So what is our PMD stock prediction for 2019?
Over the past five years, the stock has traded between $9 and $24. Its movements have been very connected to its quarterly reports. In the short term, we have concerns about its revenue flattening and earnings growth stalling.
Consequently, over the short term, we’re skeptical and somewhat bearish. We expect the stock to see more downside than upside.
Over the long term, if revenue and earnings growth pick up again, the stock might be worth nibbling at in the expectation of higher prices a couple of years down the road. But PMD is only suitable for aggressive investors who don’t mind shouldering extra risk.