"The analyst community has yet to weigh in on Gum Tech -- aside, that is, from GunnAllen Financial, a Tampa firm that recently reiterated its "strong speculative buy" rating. Speculative sounds right, but GunnAllen seems to think the company trades on the OTC Bulletin Board. Hard to blame 'em."
=========================================
Wednesday, May 21, 1997
Gum Tech International, Inc.
(Nasdaq: GUMM)
Phone: 602-252-1617
gumtech.com
Price (5/21/97): $11 1/2
HOW DID IT DOUBLE?
Gum Tech manufactures, you guessed it, high-tech chewing gum. After trading for most of the past year around its April initial public offering (IPO) price of $6 a share, this stock dipped to $2 1/8 last November after reporting a huge third quarter loss. The recent advance follows new product announcements and manufacturing agreements.
Gum Tech hopes to take advantage of the latest health fads by cranking out new gums with zinc to treat colds, the anti-oxidant DHEA to keep people young, caffeine to boost energy levels, and so on.
On April 22 the firm announced a deal to produce Chew Bright, a new anti-plaque gum. The stock got another boost on May 7 when the firm won exclusive worldwide manufacturing and co-distribution rights for a new gum version of CigArrest, a lobeline sulphate smoking cessation product that has been used by three million customers and generated over $100 million in sales over the past 13 years.
BUSINESS DESCRIPTION
The gum business is dominated by giants like Wrigley, but Phoenix-based Gum Tech works a specialty niche, making and marketing gums with vitamins and over-the-counter drugs. The company has its own name brands, but does much of its business as a contract manufacturer. A former Lifesavers taste-master mixes up the flavors.
The company distributes its products to 80% of the nation's leading drugstore chains, many mass market chains, major supermarket chains, and health food stores. It is also expanding its international distribution.
FINANCIAL FACTS
Income Statement
12-month sales: $5.4 million
12-month income: ($1.9 million)
12-month EPS: ($0.42)
Profit Margin: N/A
Market Cap: $79.0 million
Balance Sheet
Cash: $2.6 million
Current Assets: $5.7 million
Current Liabilities: $0.6 million
Long-term Debt: $3.97 million
Ratios
Price-to-earnings: N/A
Price-to-sales: 14.6
HOW COULD YOU HAVE FOUND THIS DOUBLE?
This double remains unfathomable. At its IPO price of $6 a share, the stock traded around six times trailing sales, lofty even for a company then enjoying a 11% profit margin. Sales actually dropped last year, as two of Gum Tech's major customers cut their orders, leading to a 75% reduction in revenue in the third quarter versus the year-ago period. A loss of $0.34 per share in that quarter contributed to a loss of $0.60 per share for the full year. Operating expenses alone outstripped revenues.
Gum Tech did show 1997 first quarter profits of $.08 per share on a 173% boost in sales to $2.43 million. Problem is, $1.7 million of these "sales" involved an exchange of discontinued or excess inventory for advertising and other barter credits from a firm called Active Media Services. Without this barter arrangement, the company would have lost money in the quarter. Gross margins of 52%, though, suggest Gum Tech ought to be able to make money if someone will buy its products.
WHERE TO FROM HERE?
The analyst community has yet to weigh in on Gum Tech -- aside, that is, from GunnAllen Financial, a Tampa firm that recently reiterated its "strong speculative buy" rating. Speculative sounds right, but GunnAllen seems to think the company trades on the OTC Bulletin Board. Hard to blame 'em.
As for CigArrest, over the first year of the contract the company will produce 1.5 million packets to sell at $12.95 each. CFO Jeffrey Bouchy won't comment on the firm's profit margins on the deal, pointing instead to the lofty gross margins as a guide. In any case, many experts believe that CigArrest, one of the few anti-smoking products without nicotine, actually isn't effective.
There's also at least one skeleton in the company's closet. Brett Bouchy, the CFO's brother, once owned a 49% stake in Gum Tech. But owing to a censure from the National Association of Securities Dealers (NASD), the SEC wouldn't let the company go public until Brett Bouchy sold his shares -- which he did.
Investors interested in chewing on this stock might venture to the Fool message folder, where they'll find skeptical Fools mixing it up with Gum Tech's CEO Gerald Kern.
With a lofty price-to-sales ratio on what appear to be questionable sales, this stock looks like it could be one of those slow-motion bubbles that just quietly bursts all over your face.
-Louis Corrigan (RgeSeymour@aol.com)
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