Joe: The article was irrelevant. The stock is just absurdly cheap, selling for less than a buck more than its cash per share. The company's bad numbers in the past year have all been sort of voluntary, a function of massive advertising spending to try to get new users for its main product. The advertising hasn't worked, and I hear it will be cut back. Perhaps others are starting to hear this too, and thinking about the implications.
Without that heavy (and thus far useless) spending, CNXS is very, very profitable. The key thing to realize is that most of CNXS's sales go to people who buy Breathe-Rights because they know it works for them. These people's purchases are not affected at all by the level of advertising.
This is different that most consumer products, where a cut in advertising causes users to forget about Pepsi and switch to Coke, for example. Since the products are effectively identical, heavy advertising is required to hold market share. But there is nothing in the stores remotely close to Breathe Right, and as a result it has attracted an extremely loyal user base, more than almost any other consumer product I can think of. The product is an amazing cash cow, but investors don't realize this because it is covered up by the money misspent trying to get new customers.
With the new president, two possibilities are likely, both of which are favorable. One is that she manages the creation of some very effective advertising, in which case the expense might drop a little, but the number of new users would soar and the cash cow gets even larger as some percentage of those trying the product become loyal users. Possibility two is that she concludes that nothing (other than word of mouth, perhaps) will cost effectively get new users, so the advertising expense will get cut way back, and the profits expand substantially for that reason.
Either outcome is fine, and one of them or the other is highly likely, yet investors have treated this company as if it has bad products that no one wants. In fact, CNXS is a disguised money machine, and the disguise will be removed over the course of the next year. |
