Sharps Compliance Corp. (NASDAQ:SMED)

TMFEnochRoot (99.85) Submitted: 2/15/2010 1:47:58 PM : Start Price: $8.51 SMED Score: +46.53

SMED is a company benefiting from a huge one-time sales and earnings surge, with no reason to believe the March-Dec '09 performance will be repeated. Back in Feb. '09 SMED got a contract from "an agency of the US Government" (in their SEC filings they strangely do not give any more clarity on exactly which agency the contract was from.) The contract's value is ostensibly $40 million dollars, but the last 9 million of it is subject to the unnamed gov't agency picking up an option to continue working with SMED through a "maintenance" program for the units the gov't purchased in the first year of the program. Note the timing of the revenues from this contract: $28.5 million in year one (which is the revenue you currently see in SMED's results ended 12/31/09), $1.6 million in year two (the year we are entering now) and an optional $3 million each year in years 3, 4, and 5 should the unnamed gov't agency pick up the option.

So, the surge in revenues you see in the trailing 12 month numbers are one-time in nature, and we are about to enter a period where revenue will decline about 60% next year, before accounting for any growth outside of this government contract. Outside of this single gov't contract, SMED has limited history of growth in its operations, though recently the H1N1 flu season resulted in a spike (of about $1 million) in their retail segment, which sells disposal equipment to pharmacies. Although their investor presentations trumpet the massive growth quite prominently, as you can see below, growth excluding the one-time revenue surge from the government contract is substantially more subdued.

If you consider the business prospects outside of the government contract, you'll find a company whose stock assumes some pretty substantial growth prospects, growth that SMED has not been able to realize to date. I think SMED probably has about $1-2 million in pre-tax earnings power outside of the 1-time contract, even with a 20x multiple attached to that earnings stream (to assume substantial growth prospects) and an assumed $25 million cash balance from the profits of the gov't contract, leaves the stock worth only about $3 - $5.

For the Last 12 Months Ending
                  12/07   03/08   06/08   09/08   12/08   03/09   06/09   09/09   12/09
                           
Revenue               12.9      13.0      12.8      13.7      13.3      16.4      20.3      31.4      44.0
Gov't contract            -      -      -      -      -       2.9        6.1       17.1    28.6
Revenue ex Gov't contract   12.9      13.0      12.8      13.7      13.3      13.5      14.2      14.3      15.4
Revenue Growth                                 3.2%   26.4%   58.1%   128.9%   230.0%
Revenue growth ex-Gov't contract                        3.2%   4.0%   10.6%   4.3%   15.6%

From the recent 10-Q:
On February 2, 2009, the Company announced a $40 million contract award (the “U.S. Government Contract”) to provide its Sharps®MWMS™ to an agency of the United States Government. The total contract is expected to be executed over a five year period (one year plus four option years). On February 1, 2009, The Company received a purchase order for $28.5 million which represents products and services to be provided during the first contract year of which $6.0 million was billed, in aggregate, in the quarters ended March 31, and June 30, 2009, $11.0 million in the quarter ended September 30, 2009 and $11.5 million related to the U.S. Government Contract in the quarter ending December 31, 2009. In January 2010, Sharps was awarded the first option year (ending January 31, 2011) valued at $1.6 million and will be realized from February 1, 2010 through January 31, 2011. The remaining three option years are expected to be approximately $3 million per year as the program moves from the production phase to the maintenance phase. The above amounts are estimates only and are subject to change. Although the Company believes the amounts above to be reasonable based upon its current project plan, it makes no assurances regarding the actual recognition of revenue by fiscal year, which could vary significantly from that noted above.