Mad2,
I agree that GumTech's price to sales ratio looks high when calculated using past revenues. However, stock prices discount the future and not the past. How else can one explain the high valuations is stocks like YHOO, SEEK, AMZN, etc...? The fact that GUMM is trading at a price to book of 16 and a price to sales of 14 tells us one of two things: Either the company's sales and book value are going to increase in the future OR the stock price is overvalued and will probably decline.
Dave Rich of GunnAllen analyzed GumTech's business units (without Zicam) and estimated that the company will do $24 million in sales in 1999. Let's suppose for a moment that he is right and the company does $24 million in sales. $24 million divided by 6.85 million shares outstanding is $3.50 per share in sales. At today's closing stock price of 10 5/8, GUMM is trading at a much more respectable 3 times sales. Let's also assume that the stock price appreciates to Dave's target of 24 and they do $24 million in sales. Based on these assumptions, the stock would be trading at 6.8 times sales, which is very reasonable for a company that would have grown sales from $4 million last year to $24 million this year. In fact, if the company turns $24 million in sales and earn 87 cents per share as estimated by Dave, I think the stock could trade to 27 or 30. I'm basing this on a PE of 30 to 35 times, which would not be unreasonable given the potential growth in earnings.
This comes down to either you believe the estimates or you don't. Keep in mind also that the $24 million sales estimate is for the gum business only. Any sales due to Zicam would only further enhance the value of the stock. Nobody knows for sure how much the company will make from Zicam, but estimates are that GelTech will sell $45 million worth of Zicam in the first year. This is based on 3% of the $1.5 billion market for cold medications. Since GUMM owns 60% of GelTech, GumTech would book an additional $27 million in sales if GelTech sells $45 million in Zicam. That would give the company $41 million in sales, or sales per share of $5.99. Based on a price to sales ratio of 5 to 6, the stock could trade to 30 - 36 if they do $41 million in sales. We can debate the numbers for days on end. Like I said, it comes down to what you think is in this company's future. I will caution you, however, about trying to use past sales data to justify your short position.
Best of luck,
Dan |
