Ron,
Here's what I think the market is seeing. Matrixx said that they expect revenue growth of at least 30% for each of the next two years. They also said to expect R&D expense about 6% of sales to develop new products, and that last year's operating expenses, which includes advertising, is about what it needs to be to meet the company's sales targets. It doesn't take a rocket scientist to plug these numbers into a spreadsheet and calculate earnings estimates for each of the next two years. The company is putting out much better guidance now, and if they just meet it the stock is worth more.
I think that Matrixx is low-balling their guidance so they can beat it. Sales were up 76% in the first two quarters this year over the same period last year. Sales of existing products grew about 30% year over year, and the rest of the growth came from new products released last September (primarily Zicam Swabs). Matrixx is launching three new oral products this cold season, so it would be virtually impossible for them to grow sales only 30% year over year. For that to occur, sales of existing products would have to decline and sales of the three new oral products would have to be zero. Based on information in recent company press releases, it is obvious this isn't the case and that sales will grow much more than 30% this year. Gross margin should also improve in 2004 back to the more typical 70% to 72%. Matrixx settled their law suit with Zila and is contracting with a new manufacturer that will make swabs for even less than Zila charged before unilaterally increasing the cost early this year. Additional new products in 2004, most likely in the pain relief market (analgesic), will contribute to next year's growth.
If Matrixx increases sales 40% this year (conservative view in my opinion), the company would earn about 30 cents per share, or more than 100% above last year's earnings of 14 cents per share. If sales grow another 40% in 2004, the company would earn 60 to 70 cents per share in 2004, which equates to about 130% growth in earnings. While those numbers might seem high to the casual observer, the number of shares outstanding has remained relatively constant at 9.5 million the last two years and Matrixx has finally exceeded their break even point with growing sales of existing products and new products being released relatively quickly. The company released five new products last September and three new products this quarter. Matrixx has a lot of earnings leverage due to the small number of shares outstanding, high gross margin of about 70%, and cost structure which is primarily variable. The company's fixed expenses are low when compared to sales expectations.
At least two new funds bought shares in MTXX last quarter. I think they are buying because they see earnings next year of at least 50 cents per share with year over year growth of more than 100%. Even if you assume that the next two years growth isn't typical and reduce it for the next five years to say 50% per year, apply a reasonable PE to those earnings, you can see that the stock should trade to at least the mid 20s next year if the company just meets their guidance. The high short interest just adds fuel to the fire. Most of the shorts in this stock are the same idiots that shorted it in 1999 and 2000. They are living in the past and are wrong plain and simple. The stock is up 50% in 2 months, but I think that it will trade much higher and I have no interest in selling at 10 or 11. There might be more serious resistance at about 11.70, and if it breaks that the fireworks could start.
All that said, here's my plan:
1. Hold a full position as long as the stock moves up slowly and steadily like it has the last few months.
2. Sell a couple thousand shares if it spikes quickly and use that stock as a trading position.
3. As always, keep an eye on the fundamentals and sell if things don't appear to be working out like I expect.
I consider MTXX a growth stock, and it is difficult to trade growth stocks during their growth phase. Quite often they trade steadily higher with only minor and short-lived pull backs. This stock isn't going up on hype like in early 2000 when it reached 36. Fundamentals are driving the stock, and I think that it is worth even more. |
