ProPhase Labs: A Stellar Quarter and Another Special Dividend (NASDAQ: PRPH)

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This article follows on from my previous coverage on ProPhase Labs (NASDAQ:PRPH), so if you’re new to the business, please start with the previous articles.

The big news I want to cover here is the latest PRPH quarterly release income and the potential opportunity it creates.

1st quarter profits

Friday, May 13, 2022, PRPH announcement record quarterly revenue and net income, driven by the success of its (relatively) new lab and the Covid Omicron wave. Here is the most relevant information from the publication of the results:

  • Net revenues of $47.5 million for the three months ended March 31, 2022 compared to $15.3 million for the three months ended March 31, 2021, an increase of approximately 211%.
  • Net earnings of $12.5 million, or $0.81 per share, for the three months ended March 31, 2022, compared to net earnings of $1.1 million, or $0.07 per share, for the quarter ended March 31, 2021.
  • Cash, cash equivalents and marketable securities of $29.4 million and net working capital of $52.6 million as of March 31, 2022.
  • 377,000 diagnostic tests performed during the quarter ended March 31, 2022, compared to 113,000 diagnostic tests performed during the quarter ended March 31, 2021.
  • Payment of a special cash dividend of $0.30 per share on March 10, 2022.
  • Repayment of $2 million of outstanding long-term debt.

Now, to be sure, that quarterly revenue rate won’t hold, both because Covid and the flu are seasonal, so there will be more testing in the first and fourth quarters of each year, and As discussed on the Benefits Appeal, HRSA funding for low-income testing may not be renewed.

HRSA is the US Health Resources and Services Administration, and it ran a program to cover testing for uninsured people. Of his website:

The U.S. Department of Health and Human Services (HHS) is reimbursing health care provider claims generally at Medicare rates to test uninsured people for COVID-19, treat uninsured people with a diagnosis of COVID-19 and administering COVID-19 vaccines to uninsured persons. people.

But this program was interrupted on March 22 due to lack of funding.

The uninsured program stopped accepting claims due to a lack of sufficient funds. Confirmation of receipt of your claim submission does not mean that the claim will be paid. Any claims submitted after March 22, 2022 at 11:59 p.m. ET for testing or treatment will not be processed for adjudication/payment. Any claims submitted after April 5, 2022 at 11:59 p.m. ET for vaccine administration will not be processed for adjudication/payment.

Both of these factors were recognized during the recent earnings call, where it was expected that Y/Y quarterly revenue and earnings would still be very supportive, even if HRSA funding is not renewed.

Additional lab capabilities

One of the reasons the company is confident it will deliver positive Y/Y quarterly numbers is the expansion of its lab capabilities. In particular, its acquisition of Nebula Genomics in Q3 2021 now enables it to provide whole genome sequencing.

The slide below shows how the costs of these tests have come down significantly:

whole genome sequencing

PRPH investor presentation

Currently, Nebula’s offerings are limited to online sales only, and so far sales have been de minimis, but the company is working to expand availability to retail stores. Here’s an elided discussion of those plans from the earnings call (with my emphasis):

But Nebula provides a whole genome sequencing line directly to consumers. We will expand and leverage our distribution of food and mass market drugs to also sell to consumers in retail stores. […]

On top of that, both selling whole genome sequencing online and in stores, we’re going to have a subscription model connected with that. We have a proprietary library. […] And this subscription model is fantastic for us, huge profit margins. We have a few scientists who update it regularly, but so understand that the more consumers who sign up, everything is electronic, the more it costs us very little to have more people sign up. So this is a phenomenal subscription game plan for us to increase our revenue […]

This is the future of precision medicine. This is the future of health. At the heart of it is a genetic test. We want to be the leader in the country in providing genetic testing, both whole genome sequencing and a full range of genetic testing. Not only directly to the consumer, but ultimately to physicians. And we are already talking to universities. […]

Opportunity

The first quarter results and outlook create what I think is an opportunity as currently the street has not priced in improvements to the company’s earnings potential.

One way to see this is through Seeking Alpha’s handy earnings tab.

EPS estimates

Finding the Alpha Earnings Tab

Analysts have significantly underestimated earnings for the past two quarters and only expect bigger losses going forward. I expect earnings to be positive and not negative going forward, and if so, today’s stock price of $7.03 is too low. If we estimate the average EPS execution rate to be around $0.20 per quarter (albeit very lumpy, Q1 and Q4 being much better than Q2 and Q3) and assign a P/E of 20X, this gives a price target of $16.

Special dividend

PRPH’s underrated success is also evident in its history of issuing special dividends to shareholders. This can be seen even better using another of Seeking Alpha’s search tabs:

PRPH dividend history

Looking for the Alpha Dividend Tab

Over the past four years, PRPH has declared $2.40 in special dividends per share, or about $0.60 per year. If these were regular dividends rather than special dividends, at the current share price, the shares would yield around 8.5%. At the $16 target, the yield would still be attractive at 3.75%.

The payment of these dividends along with the repayment of long-term debt also indicate that the company has plenty of cash and will not have to issue shares at today’s depressed stock prices.

Risks and conclusion

Generically speaking, PRPH is a small cap stock with the inherent risks. Specifically, I think the biggest risks for PRPH lie in the execution of its business plan. If the company is unable to bring its new lab tests (both conventional and whole genome sequencing) online fast enough, revenues and profits will suffer if Covid testing drops significantly. In addition, a recession could harm its other sectors of activity.

However, I believe that the street grossly underestimates the earnings potential of the company, and therefore the risk/reward balance is very favorable to the current share price. I remain long on my entire position with the expectation that the stock eventually trades at least at the $16 level.

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