Nokia (NOK) released their much-anticipated Q3 earnings report before the bell today, appeasing many shareholders, with shares up more than 8% in pre-market trading. Much of the fanfare is attributed to the underlying profitability Nokia achieved, and the strong guidance they gave for their fourth quarter. With seasonality negatively affecting NSN and Here, Nokia's numbers were still strong, and now it is becoming clearer to investors how successful a phoneless Nokia can be. Shares are retesting their highs of $7.40, and it is now clear that the more than 3% drop in shares prior to Nokia's earnings release presented a great buying opportunity. With earnings out of the way, and strong guidance for the upcoming quarter, Nokia seems poised to breakout to new highs, finally cross Blackberry's share price, and begin to flirt with double digits. The future seems brighter than ever for New Nokia.

Farewell Lumia

Perhaps the most eagerly awaited number from Nokia was its number of Lumia models shipped, coming in at 8.8 million units. This represented an increase of approximately 20% quarter over quarter, and was more than triple the 2.9 million Lumias sold year over year. Nokia's feature phone sales increased quarter over quarter, coming in at approximately 55.8 million units. This number is not pretty, representing a 27% decline year over year. The competitive landscape and sea of cheap Androids has made it difficult for Nokia to stand out in emerging markets, though their Asha phone models continue to post encouraging growth, selling almost 6 million units this quarter. While Nokia has still been struggling with its feature phone sales, it seems a bottom was placed last quarter when they sold approximately 54 million units.

However, if the Microsoft (MSFT) deal closes in the first quarter of 2014, the above numbers are moot. This is now Microsoft's problem. It is interesting to wonder how the street would view these numbers if a deal with Microsoft was not on the table right now. The Lumia is posting slow, yet steady growth, and the continued rise throughout Europe does not seem to be stopping. Furthermore, Nokia's presence in North America continues to post strong growth levels, due to their extremely low penetration. Nokia's smart phone sales increased 180% quarter over quarter, and 367% year over year in North America. Nokia's strong efforts aimed towards becoming a true competitor in the smart phone industry seem to be bearing fruit, and now Microsoft has the advantage of taking the reins of this unit and all of its momentum.

With Lumia sales sitting at 8.8 million units, it is not the 9.5+ million units some investors were hoping for, meaning it is more than likely that Microsoft's offer of $7.2 billion will remain just that. Nokia's device unit is leaving on a high note, with last week's announcement of an impressive tablet, and two phablets. It will be interesting to see If Nokia breaches 10 million Lumia units for the holiday quarter, and if so, what the effects will be on its share price.

Nokia Solutions Network

The true driver of Nokia's business took the stage during Nokia's conference call, NSN. NSN achieved its 8th consecutive quarter of positive cash flow, and 6th consecutive quarter of operating profitability. NSN achieved an operating margin of 8.4%, which beat the streets estimates by 1.4%. Though this is lower than past figures, weak seasonality and restructuring have an effect here, and the strong guidance for quarter four of 12% operating profit +/- 4% seems to be the real number investors are focusing on.

NSN presence in North America increased 5% year over year. Nokia's attempt at organic growth in North America does not seem to be working, and though Nokia executives say "market forces" will determine whether they acquire another company, it seems more than likely that a joint venture with Alcatel Lucent's (ALU) wireless division (or acquisition) will be necessary for NSN to gain considerable market share and become a true competitor in North America.

Nokia Solutions Network contributed $3.7 billion and $2.06 billion to Nokia's gross and net cash position, respectively. With strong margins moving forward, strong growth prospects, and continued development of 5G technologies, NSN should continue to contribute a considerable amount to Nokia's overall business for the coming years, and be a true competitor to Ericsson (ERIC), Huwaeii, and others.

Here, Advanced Technologies, Taxes, and Dividends

Here Maps recorded $290 million in net sales, and a non-ifrs operating margin of 9.5%. The operating margin increased more than 6% quarter over quarter, but both sales and operating margins for Here are significantly down year over year. What is encouraging however, is their strong presence in the automobile industry, and recent buzz surrounding future products, including connecting your car's dashboard to the cloud and accessing all of your content. Nokia has announced relationships with several auto manufacturers, including Mercedes Benz, and their penetration in the industry does not seem to be slowing down. Here may become an increasingly valuable business as Nokia signs more contracts and adds more value to their offerings for the automobile industry.

Nokia made it clear in their conference call that due to patent royalties being extremely lumpy and random, it is nearly impossible to predict guidance for the advanced technologies division. Having said that, management explained that they will begin "active management of their patent portfolio", and with Nokia's handset division on its way out, the possibility of counter suits seem less and less likely, meaning Nokia will become extremely aggressive with their valuable patent portfolio. We can expect these revenues to increase, and Nokia may be on the verge of receiving nearly $1 billion in licensing fees and royalty payments in the coming quarters.

Nokia also made it clear that they are committed to continue their research and development into advanced technologies, and plan on continuing the development of projects already in the works. The continued focus on R&D should continue to add valuable patents to Nokia's portfolio, with the possibility of generating recurring revenues and large sum payments. Some technologies in the works at Nokia include the development of Graphene, possibly the thinnest, most durable material ever made, and the next generation of mobile bandwidth, 5G. Being at the forefront of development of 5G technologies is reassuring to investors who want to open a long position in Nokia.

One piece of information that is extremely bullish for Nokia, their investors, and cash position is taxes. Nokia has suffered a considerable loss over the past few years, and with strong profitability expected in the coming quarters, it is reassuring to know that Nokia has the ability to shield up to $11 billion in future profits from taxes. Yes, $11 billion. Those tax savings can significantly add to Nokia's net cash position and bottom line. Furthermore, the Finnish corporate tax rate is expected to drop to 20% next year, which should also add to Nokia's profitability in the future.

The dividend is coming. When executives were asked when investors should expect shareholder distribution of excess cash, they simply responded, probably around when the Microsoft deal closes, and not before. Therefore, it is safe to say that the reinstatement of Nokia's dividend will occur in the first quarter of 2014. This should attract a plethora of dividend investors and continue to add to the momentum of Nokia's stock price appreciation.

Conclusion

Nokia has reemerged from the depths of possible bankruptcy and is now a shining star among analysts and investors, including Dan Loeb. The strong operating margins of NSN, and encouraging future outlook for Nokia's remaining businesses, has reassured investors that Nokia is here to stay. Nokia has turned into a cash cow thanks to Microsoft, and the billions of dollars in excess cash will serve Nokia and its investors well in the future. With some price targets for Nokia upwards of $20 (even $60!), I believe it is not farfetched to see Nokia test double digits once the Microsoft deal has been closed. Current investors who got in before the Microsoft deal was announced should continue to hold on to Nokia, and wait for the Microsoft deal to close and their dividend to be reinstated until taking profits. Nokia's downside continues to be limited at these levels; it is pre-mature to sell shares.
All financials were sourced from Nokia's 3Q report.

Almost all early stage medical device companies are extremely risky investments. The projected valuations of these stocks are hanging on to a thread, being solely based on the pending results and approval of potential life saving devices and procedures. These companies are not profitable and have accumulated a large deficit due to their focus on research and development. Neovasc Inc. (NVCIF) is no different. Buying stock in this company is extremely speculative and risky. Having said that, I believe Neovasc Inc offers one of the most compelling risk/reward profiles I have ever seen, and speculative investors should consider opening a position in this company immediately, here's why.

Overview

Neovasc is a Canadian medical device company that focuses on manufacturing innovative products for the rapidly growing cardiovascular market place. The company operates three different divisions: the production and sale of tissue products to third party medical companies, the development of the Neovasc Reducer, and the development of the Neovasc Tiara. The company was incorporated in 1998, and commenced their business operations in 2002 with the acquisition of Neovasc Medical. The company is made up of several mergers, which have all funneled down to Neovasc's three main business divisions.

Neovasc is not profitable, and as of June 2013, they had an accumulated deficit of $74 million. This number continues to rise as the company develops and conducts trials on the Reducer and Tiara. With current share prices hovering around $2.50, the company has a market cap of approximately $110 million. I believe Neovasc's growing tissue division, and the value of their Reducer and Tiara, have the potential to propel this company into a multi billion-dollar market and considerably increase their share price in the near future.

Peripatch Tissue Products

Neovasc has a core, profitable business of converting animal skin into biological tissue that is used in medical devices that are implanted into patients, called Peripatch. More specifically, these tissues are used for aortic and mitral heart valves, surgical patches, artificial heart components, covered stent grafts, and specialized vascular devices. Peripatch received a CE designation and FDA approval in 2009. The company recently sold the rights to their surgical patch unit to LeMaitre Vascular in October of 2012 for $4.6 million. The divestment of this unit has allowed the company to focus their attention on the production of their higher margin tissues that are used for heart valves.


The company utilizes a state of the art facility and has a highly skilled workforce that develops and manufactures the biological tissue. The animal skin that is converted into tissue is sourced from various slaughterhouses located in the US, Europe, and Canada. The company has ample FDA approved clean rooms to meet the increasing volume demand from their clients. Currently, upwards of five medical device companies receive the Peripatch tissue and consulting services for their devices from Neovasc. The tissue is also incorporated in Neovasc's Reducer and Tiara. Neovasc's customers use the tissue as a component of their medical devices, which are currently, or soon to be undergoing clinical trials and awaiting FDA approval. Though the company has not disclosed the identity of their customers, possible candidates include Edwards Lifesciences (EW), Medtronic (MDT), and Boston Scientific (BSX). All of these companies use tissue leaflets for their transcatheter valves.

If any devices from Neovasc's five customers succeed in gaining FDA approval, then the company should experience a sharp increase in demand for their Peripatch tissue. The trans-catheter aortic heart valve market has grown from $200 million in 2010, to more than $1 billion this year. It is expected to surpass $2 billion by 2014. The trans-catheter mitral valve market is expected to reach $1 billion by 2015.

Neovasc's Peripatch division has experienced strong growth in revenues and continues to increase their profitability margin. The company's division generated $7.8 million in revenue in 2012, and is on track to generate nearly $10 million in 2013, having already recorded sales of $4.8 million in the first half of 2013. CEO Alexeis Marko believes Peripatch can become a $30+ million business over the next four years. Again, these revenues are derived from the sale of the Peripatch tissue that is utilized in medical devices currently undergoing trials, and through the consulting services Neovasc provides to their customers. With Edwards Lifesciences recently obtaining FDA approval, and Medtronic, Boston Scientific, and others on the verge of obtaining FDA approval for their transcatheter devices, investors should expect Neovasc to experience continuous growth in revenues from their tissue business in the upcoming quarters.

Almost all of Neovasc's earnings that are derived from the tissue business are used to fund the development of the Reducer and Tiara. This is a unique position to be in for a small medical device company, who would usually have to hold several rounds of stock offerings to fund their operations and in effect would create dilution for current shareholders. With a strong uptrend in revenue growth for Peripatch, Neovasc should have ample resources to fund the continued research of their products for the foreseeable future.

One last piece of information that is encouraging for Neovasc and its investors is the fact that all five of their customers need Peripatch desperately. If any of the customers for some reason switched Neovasc's Peripatch tissue for another company's in their devices, they would have to restart the entire FDA approval process, trials and all, which would delay the development of their product by a number of years. Because the Peripatch tissue is crucial for Neovasc's customers, they cannot afford to lose access to it. Therefore, if for some reason Neovasc's two products under development do not pan out as expected, then there is still significant value in the Peripatch division and a bidding war between Neovasc's two largest customers would most likely commence.

The Neovasc Reducer

Now here lies the true potential within this company. The Neovasc Reducer is a medical device used for the treatment of refractory angina, a life-threatening condition that causes constant and severe heart pain and is a significant disability that negatively impacts the quality of life for patients. The Reducer is implanted via a minimally invasive procedure that narrows the coronary sinus through the implantation of the device.


Currently, there are limited treatments available for this heart condition, besides catheterizations, and invasive surgery that is expensive, minimally effective, and only suitable for a small population of patients. The Reducer uses non-surgical techniques to implant the device. The total procedure time takes less than 20 minutes, and patients are discharged within a day.

Even more impressive than the procedure time, are the results. The Neovasc Reducer is truly a one of a kind product that has already improved the lives of many. One patient, who had a CCS grade of III, which means patients experience symptoms with everyday living activities, could not walk more than 200 meters on a flat level, and suffered severe symptoms when climbing a few stairs. Six months later, after implementation of the Reducer, the patient has a CCS grade of I, meaning patients experience symptoms only during prolonged physical activity, and is now able to ride a bike for up to sixty minutes a day.

The medical community is excited about this device. Key opinion leaders are working as advisors on the Reducer program, including doctors from Harvard, MIT, Columbia University,and Tel Aviv Souraski Medical Center.

The Reducer has already received a CE mark designation in Europe, and six-month follow up data from their COSIRA trial, a rigorous, sham-controlled study with more than 120 patients enrolled, is expected to be released within the next month. If the Cosira results are positive, Neovasc plans to form a distribution partnership with a medical company, or sell their device to a medical company that already provides similar cardiovascular devices. Neovasc has no sales team in place, and with commercialization in Europe right around the corner, it does not look like Neovasc plans on building a sales team either. Some potential suitors include Edwards Lifesciences, Medtronic, Boston Scientific, and Abbott (ABT). The company plans to begin US trials after the COSIRA study is completed.

There are more than 2.5 million patients in the US, Canada, and Europe that suffer from refractory angina, 400,000 new patients are diagnosed annually, and 1 million patients per year under go repeated surgeries and catheterizations to treat the problem. With a projected selling price of $3,000, that leaves a total combined market potential of more than $10 billion. With Neovasc's current market cap sitting near $110 million, I believe there is a lot of room for stock price appreciation, based off of the Reducer alone.

The Tiara

There is one more important component for this company, and that's The Tiara, a possible diamond sitting on Neovasc's lap. The Tiara is a transcatheter device that treats mitral regurgitation. Mitral Regurgitation (MR) occurs when the diseased mitral valve allows blood leakage into the left atrium. This is often a severe condition that can lead to heart failure and death. Currently, there is no effective treatment besides conventional surgery, which is extremely expensive, and only appropriate for approximately 20% of patients.

This short video highlights The Tiara and its lifesaving potential.

The Tiara was selected as a best new device concept at the TCT 2012 Scientific Symposium, and recent tests in animals have been successful. The Tiara device was successfully implanted in 81% of test animals, and total procedure times were only 17 to 26 minutes long. The results in the animals were promising as well. There was no obstruction to the left ventricular outflow tract, no encroachment on the aortic valve, and no significant paravalvular leak. Furthermore, the Tiara device demonstrated solid function more than three months after the devices were implanted.

While The Tiara is still in early stages of development, the potential value behind this device is staggering. First, it should be noted that because of the complexity of mitral valve anatomy, the development of transcatheter devices used to treat MR have lagged far behind aortic valve devices. In other words, there will be very few competitors in the Mitral Valve device space, and based off of available data, The Tiara seems to be the frontrunner.

There are approximately 4 million patients in the US alone who suffer from MR, and approximately 600,000 new patients are diagnosed with MR in Europe and the US annually. This device is priceless. The market potential could be tens of billions of dollars, and Neovasc is the first company to make headway with an effective device for MR.

The company expects to begin human trials soon, and plans to apply for CE designation in Europe in the next two to four years. The Tiara would take years to come to the market, but if proven effective and safe in human trials, the valuations could be massive.

Risk/Reward Profile

The risks surrounding Neovasc are minimal when examining the upside potential. If The Reducer and The Tiara fail, then the potential value of this company would drop significantly, and the idea of entering a billion dollar market would be far fetched. Furthermore, if any of Neovasc's five customers fail and abandon the development of their devices, Neovasc would experience a decline in revenues.
With shares currently trading near $2.50, I believe downside is limited to $1.50, which would be a conservative takeover price if a bidding war ensued between Neovasc's large medical device customers for their Peripatch division. Because Neovasc's customers are most likely competing with each other in the heart valve market, the winning bidder of the division would have the ability to stop supplying their competitor with Peripatch tissue, and effectively set back the development of their competitor's device by a number of years. Because of this, I believe the Peripatch business is worth upwards of $3.00 per share. A bidding war for the tissue division could get pricey in a short amount of time, which would be great for shareholders.

If Neovasc's tissue division continues to post strong growth rates, and if The Reducer's 6-month follow up data is positive in its COSIRA trial, and the company enters a definitive agreement with a large medical company, I believe Neovasc can reach upwards of $7.00 per share. If you include the possibility of The Tiara proving to be safe and effective in humans for the treatment of MR, then I believe Neovasc would be comfortably worth more than $10.00 per share.

Dr. Phillip Frost and Management Ownership

I don't want to come off as a broken record, but it pays to follow Dr. Frost's investments. Just take a look at a six-month chart of Castle Brands (ROX), Opko Health (OPK), Safestitch Medical (SFES), Ladenburg Thalmann Financial (LTS), or Tiger Media (IDI). The list goes on. Dr. Frost has had an impressive track record with his previous and current investments, and Neovasc has the potential to be his next big winner. Frost owns more than 32.3% of Neovasc, and has been buying shares since 2008. Dr. Frost last purchased stock in January of 2012 at $1.35 a share. If you couple that with the fact that management and insiders hold approximately 75% of shares outstanding, Neovasc seems primed to rise.

The Logistics of Buying/Selling

As mentioned earlier, Neovasc is a Canadian company. Their stock is listed on the TSX Venture Exchange as NVC.V. However, there is also a US, over the counter issued stock that you can buy in US dollars. Purchasing shares of NVCIF will take your US currency, convert it into Canadian dollars at the current exchange rate and charge an extremely fair conversion rate, almost negligible, and then automatically purchase shares of Neovasc from the TSX Venture Exchange. When you purchase shares of NVCIF, your order goes directly to the Venture Exchange. American investors who want to purchase Neovasc, or already have, should follow NVC.V for up to date price and volume quotes, and buy or sell their holdings through the over the counter option . When referencing NVC.V for current price quotes, remember that the stock is listed in Canadian dollars. The quote for NVCIF is never accurate, and should only be referenced to when selling or buying. It is often a day or two behind with regards to volume, and is not reliable. Also, if you have a foreign account set up with your broker, you can convert your money to Canadian dollars and purchase Neovasc directly off of the TSX Venture Exchange yourself.

This is a thinly traded stock with low volume. Some days, for NVCIF zero shares are traded. The bid/ask quote for NVCIF is often separated by at least $0.10, but this is solely due to the conversion rate. The logistics behind trading Neovasc should not intimidate investors who are willing to sit tight on a promising investment, and these small complexities are a key reason why this company is grossly undervalued.

I purchased shares of NVCIF at $2.41, and saw my exact purchase amount directly on the TSX listing of Neovasc approximately 15 minutes after my order went through. If you purchase NVCIF, be patient, the order went through, it's just delayed by a couple of minutes to see on the NVC listing.

Conclusion

Neovasc Inc. is a unique medical device company that has promising growth potential and plenty of risk, just like any other small cap medical company. What sets Neovasc apart from others are the promising results from both of their devices, the fact that they are primarily funding their research and development through their own tissue division, and the lack of investor awareness.

Neovasc provides a compelling opportunity for investors. The stock has been trading sideways for almost a year, and the expected release of the COSIRA data next month may be the catalyst needed to kick this stock above its resistance level of $3.00. With data being released imminently for both The Reducer and The Tiara, and a compelling risk/reward profile, investors should consider opening a position in Neovasc below the $3.00 level.

All Information was sourced from multiple corporate presentations (here, here, and here) and quarterly and annual filings from the company (here, here, and here).

Catalyst Pharmaceuticals (CPRX), a small-cap biopharmaceutical company that produces novel orphan drugs, and is thought to be the next Acadia (ACAD) among many investors, experienced a strong sell off on Friday after an investigative report from The Street's senior columnist, Adam Feuerstein. The article bashed the company for attempting to profit off of sick people with their upcoming drug Firdapse, and almost portrayed Catalyst Pharmaceuticals as an evil company. Because nothing has fundamentally changed for the company, and the article was somewhat biased and only talked about one segment of Catalyst's pipeline, I believe now is the perfect time to open a speculative position in this potential blockbuster pharmaceutical company if you haven't already.

The Article

The article, "Catalyst Pharma: Orphan Drug Poseur, Profiteer" by Adam Feuerstein presents an in depth look at the current treatment available for patients suffering from Lambert-Eaton Myasthenic Syndrome ((LEMS)), and slams Catalyst for attempting to move into this space with their drug Firdapse, which has already been approved in Europe, and was recently awarded breakthrough therapy designation from the FDA in August of this year. Catalyst received the rights from Biomarin Pharmaceuticals (BMRN) to market Firdapse in the United States, and is currently finishing Biomarin's Phase III study with top-line results expected in 2014. Because of Firdapses success in Europe, there is a high likelihood that the FDA will approve the drug and Catalyst will commence sales by 2016.

The main gripe Feuerstein had in particular with Catalyst, is the fact that there already is an almost identical treatment available for LEMS patients that is offered for free, called 3, 4-Dap. This drug is produced by Jacobus Pharmaceuticals, a small, family-owned company that offers the drug through academic medical centers and special clinics. The company has been producing the drug for more than 20 years. Because the drug is not FDA approved, the company is required by law to provide the drug for free. However, the tone of the article paints Catalyst as a villain, and Jacobus Pharmaceutical as a hero.

The quotes below help prove my point.

"This 'We're an orphan drug company, too!" pitch that Catalyst makes to investors has been effective."

"But there are also some companies who will take shortcuts or push the orphan drug formula too far (in reference to Catalyst)."

Why do you supply 3,4-Dap for Free?

"Because supplying the drug for free is the right thing to do. My father believed, and we still believe, that we have a moral responsibility to support this fragile patient population and not profit from them." (Laura Jacobus)

"What Catalyst is doing is making money off LEMS patients. They don't want to help LEMS patients; they just want to make money. If I worked for Catalyst, I wouldn't be able to sleep at night." (Laura Jacobus)

"David and Laura Jacobus aren't socialists. They have no problem with companies developing novel drugs to treat disease and making money selling them. But that's not what Catalyst is doing with Firdapse…"

Considering the quotes above, the fact that Feuerstein failed to mention Catalyst's main drug under development, (CPP-115), and the fact that the article was published on Jim Cramer's website, who advised investors to sell Acadia and similar small cap biotech stocks less than two weeks ago, I believe investors should take Feuerstein's article with a grain of salt.

The Bottom Line

Feuerstein's article caused a dramatic sell off in Catalyst's shares. The stock fell 27% to $1.90, and then dropped another $0.10 to $0.20 during after hours. Shares are hugging the price level of $1.74, which was the price of their last stock offering. Nothing fundamentally has changed for Catalyst Pharmaceuticals. They still have an impressive balance sheet, legendary chemist Rick Silverman is still working on their blockbuster drug CPP-115, and after receiving breakthrough designation from the FDA, Firdapse is highly expected to be approved and commence sales in 2016.

While 3,4-Dap is free and available today, the CEO of Catalyst, who responded to Adam Feurestein via email, made some very good points as to why Firdapse is necessary for the medical community and why the company is actually not that evil after all.

Catalyst was aware of 3,4-Dap and its effectiveness in the treatment of LEMS, but because the drug has been available for more than 20 years and there is still to this day no FDA approved drug, Catalyst felt this was an opportunity to serve an underserved population of patients.

And the CEO is right; patients can only obtain the 3,4-Dap treatment through specific clinics and academic medical centers, which means availability is limited, depending on where you live. Also, Catalyst has been able to recruit trial subjects throughout the U.S., which shows that there is demand for this product. Why would patients be enrolling in clinical trials when they can get the almost identical drug for free today? Clearly there is a need for this drug. Firdapse will be a rigorously tested drug that meets the standards of the FDA and has an improved shelf life when compared to 3,4-Dap.
The fact remains, that if Catalyst manages to report positive results in 2014 on their Phase III study of Firdapse, they will most likely be granted approval by the FDA the following year and receive drug exclusivity in the U.S., barring Jacobus Pharmaceuticals from supplying 3,4-Dap. Because Catalyst is nearing the end of their study, and Jacobus is a small scale pharmaceutical company who has begun a clinical study and is currently in Phase II, with little information surrounding it and no disclosure of how many patients were enrolled, and because Jacobus hasn't managed to obtain FDA approval for their 3,4-Dap drug in more than 20 years, I believe Catalyst Pharmaceuticals will have no trouble obtaining FDA approval for their superior drug, Firdapse.

Conclusion

The panic selling that occurred with Catalyst Pharmaceutical due to Adam Feuerstein's investigative article on Friday was overdone, and the fact remains that nothing has fundamentally changed for the company. The drug Firdapse is still expected to release positive results next year, gain FDA approval the following year, and commence sales by 2016, reaching peak annual sales of up to $300 million. Include the fact that the true value behind this company lies behind Rick Silverman's development of CPP-115, which wasn't even mentioned in Feuerstein's article, and you have a stock that is sure to rebound from this sharp sell-off.

Almost all pharmaceutical companies that I stumble upon have similar characteristics. These characteristics include having some blockbuster drug in the pipeline surrounded by much hype and promise, receiving minimal revenues stemming from a different product that has less potential than the pipeline drug, consistently losing money and burning cash on research and development, and only having enough cash to fund operations until around the date when results of their blockbuster drug are expected to be released. In other words, the company's stock price and valuation is hanging on the passing of the pipeline drug, and can either be a homerun or a strike out. It's a hit or miss.

Tianyin (TPI) is the exact opposite. This Chinese pharmaceutical company has a portfolio of 58 products, is consistently making money, and currently its cash per share is higher than its current share price. This is a stable, growing small cap pharmaceutical company. It's almost boring. The company is headquartered in Chengdu, China, and is engaged in the development, manufacturing, marketing, and sale of modernized traditional Chinese medicines and other pharmaceutical products. This company is consistently growing, has solid financials and an incredibly low P/E ratio of 3.50, and is led by confident management, which is why I think this stock is considerably undervalued at today's prices.

Tianyvin Is Not So Tiny

Tianyvin Pharmaceuticals is a small growth story to say the least. From 2003 to 2013, the company has increased annual revenues from $400,000 to $67.5 million, employees from 80 to 1,200, and products from 7 to 58. The company continues to post improving profitability, and from 2005 to 2013, the company's book value increased from $500,000 to $98 million. With total outstanding shares hovering just above 29 million, Tianyvin's book value per share is $3.33. With current prices trading below $0.90, Tianyvin's share price is more than 400% below its current book value. Tremendous upside potential exists within this solid company.

Tianyvin's biggest selling product is derived from the leaves of the Ginkgo Biloba tree, and the Armillaria mellea mushroom. The combined product, Gingko Mihuan, has shown stronger results when compared to a Gingko only treatment in reducing headaches, reducing dizziness, reducing hearing loss, reducing memory loss, and treating cardiovascular diseases. Whether I believe in traditional Chinese medicines is besides the point, this one product, with the English name Yinxingmihuan Koufurongye, or simply GMOL, has generated sales of $26 million in 2013. And the trend is continuing up. Take a look at the chart.


This product is a patented prescription biopharmaceutical, and has been selected for both the national medical reimbursement list (NMRL) and essential drug list (EDL) in specific provincials of China. Patients who take drugs that are on the NMRL will be reimbursed up to 80%, while drugs placed on the EDL will be 100% reimbursed.

Its other four best selling products include Mycophenolate capsules for kidney transplants, Azithomycin tablets (antibiotics), Qingre Jiedu liquid for viral infections, and Yanyan tablets for throat inflammation. The 2013 sales associated with the listed products were $6.9 million, $4.6 million, $3.6 million, and $1.6 million, respectively.

Currently, the company has 10 drugs selected for the EDL, and 24 drugs selected for the NMRL. The company has a three-pronged distribution channel covering over 1,000 hospitals throughout China, and is currently focusing its sales on AAA and AA hospitals, which serve mostly Tier I cities and pay more for health products. The company has a sales force of more than 700 people, targeting specific market segments.

The company has three certified manufacturing plants, and has been continuously expanding their capacity for their factories since 2009. Currently, their facilities can produce 1500 million tablets, 400 million capsules, 100 million packs of granules, and 120 million tubes of liquid solution for their different medicines. The company has $10 million reserved for capital expenditures in 2014. The company also recently completed the Jiangchuan Macrolide Facility in 2011, which has expanded their production for Azithromycin and other antibiotic drugs. The company will also complete a construction project for one of their other facilities by the end of 2013. The expansion of manufacturing facilities that has occurred in the past few years is helping Tianyin improve margins by reaching economies of scale. These facilities were built to meet EU standards, so Tianyin is able to focus on producing high quality products that will set themselves apart from the intense competition. Further down the line, these past facility expansions should only materialize to increased profitability for the company.

Financials

This pharmaceutical company is in a solid financial position. The company has more than $26 million in cash. The company has $0.91 in cash per share, three cents more than today's current share price. If you buy Tianyin today, you can discount the entirety of Tianyin's growing business and still stand to gain $.03 per share. The company's net cash position decreased by $12 million when compared to 2012, but this was mostly due to a substantial increase in the company's expansion efforts, raising the company's property and equipment by almost $14 million year over year. Tianyin's current liability's continues to shrink, and the company's total debt stands at $5.9 million.

The table below helps illustrate the company's profitability margins. The company experienced explosive growth in 2010 and 2011 due to their high sales in antibiotics, but recent regulation from the Chinese government has curbed the sale of antibiotics, which flooded the Chinese market three years ago. The company's sales growth seems to have finally bottomed out, and their gross margin and operating margin both bottomed out in 2012. With stabilizing sales of their Azithromycin antibiotic, and growing sales of their GMOL drug, strong revenue figures and increased profitability should be achieved in the near future.


Bullish Notes From Latest Conference Call

After dissecting the company's latest earnings call, I noticed many bullish statements from both analysts and management, during the Q+A section. I've provided a summary of the bullish statements from the call.
-Tianyin is forecasting 10% to 20% growth for GMOL in 2014.
-Tianyin expects more provincial's to add GMOL to their EDL. As GMOL and other drugs are added to more and more provincial EDLs, their revenues will significantly increase and their margins will slightly decrease for the respected drug.
-New policies of China's healthcare reform are taking time to be implemented, and the dust should settle by mid May of 2014. Come May, the company will have a clearer picture of how the new policies will impact their sales growth. This is why the company has a conservative sales growth of 0%-5% for 2014.
-The 2014 growth figure of 0%-5% is extremely conservative, even if you take into consideration that they initiate zero wholesale contracts all year, their entire core product portfolio will experience flat growth, except for GMOL which will experience 10%-20%, and if their distribution business TMT is flat. An upside surprise in revenue is possible.
-While revenue is lower 3% year over year, the components of the revenue are improving, and profitability is increasing. Management expects to see increased revenues for 2014.
-Tianyin has spoken with consulting firms that would help them meet EU and US regulations to begin selling their products in those markets. Management is eager to expand to America and Europe, but doesn't see that happening for another one to two years.
-The company plans to initiate a stock repurchase plan after they relocate one of their facilities. The stock repurchase should occur in early 2014, originally scheduled for the end of 2013.
-Management and directors have been buying shares from the market on their own because management believes in the value of the company.
-Management owns approximately 30% of Tianyin.
-Management and analysts acknowledged the fact that Tianyin trades at below cash.
-Management expects significant consolidation in their industry (at least 50%) for the next three years, as company's who don't have a solid enough product won't submit for the costly approval necessary under China's new healthcare reform.
-If an acquisition does occur, it will be Tianyin doing the buying.
-Fewer companies in a growing industry will lead to larger growth for Tianyin.
-Having drugs listed on EDLs is a HUGE advantage.
-Management has a solid outlook for Tianyin the next three years, and believes they will be acquiring or developing new value creating medicines.
-New forms (capsules) of their biggest seller GMOL will add a significant revenue stream in the near future.
-China's new healthcare reforms will no longer have any dramatic impact on the industry; the worst is in the rear-view mirror.

Conclusion

Tianyin Pharmaceutical is a solid performing stock that has solid fundamentals and is poised to more than double in the next year. While there is some uncertainty with regards to China's new healthcare reform and the impact it will have on the company, the company's low margin generic products have been declining in revenue, and wholesale 3rd party agreements have yet to materialize, the strong performance of GMOL and expected future performance, cash and book value per share, and a diverse portfolio of products make this company a strong buy that should see a substantial increase in price in the coming year. Add in the fact that Tianyin may expand to European and American markets in the next one to two years, and you have a stock that has a strong likelihood of appreciating towards its current book value per share of $3.33 in 2014.

TPI Share Price: $0.87
Cash per Share: $0.91
Book Value Per Share: $3.33
Market Cap: $23.65 million

All information was sourced from the company's latest 10-K filing, company presentation, and conference call.

Plug Power (PLUG) is on the verge of transforming the fuel cell industry into a realistic fuel alternative. With several Fortune 500 companies already utilizing Plug's product offerings, horizontal expansion among their core products, and a blockbuster technology, Plug Power shareholders stand to be handsomely rewarded in the coming year.

Overview

Plug Power was founded in June of 1997, is headquartered in Latham, NY, and employs approximately 150 people. The company designs, manufactures, develops, and commercializes fuel cell systems targeted towards the materials handling market. Plug Power is currently teetering towards profitability, and several key developments are priming this stock to become a multi-bagger at these levels, including growing sales of their GenDrive system, planned expansion into Asia, and entering new markets by introducing new products that utilize the same fuel cell technology.


Plug Power has experienced a difficult 10+ years to say the least. Since going public in 1999, with an initial public offering of $15.00, Plug's share price has fallen from a high of $1497.50 in 2000, to as low as $0.12 earlier this year. Talk about destroying shareholder value. The stock price ballooned quickly thanks to extreme hype surrounding the emerging fuel cell industry, misrepresented data issued from previous management, and being in the midst of the dot com bubble. After destroying 99.96% of shareholder value from their 2000 highs, and with a long term downward trend line on the verge of being broken, I recommend that now is the time to open a long position in this reemerging company that is experiencing increased traction among customers, and overall excitement in the fuel cell industry.

The Product

Massive Fortune 500 companies seeking to reduce their costs and carbon footprint have purchased GenDrive systems, targeted to replace both diesel and battery-based forklifts and pallet trucks used in warehouses and distribution centers. Notable customers of Plug Power include: Coca-Cola (KO), P&G (PG), Ikea, Wal-Mart (WMT), Lowes (LOW), Kroger (KR), Wegmans, FedEx Freight (FDX), Sysc (SYY), CVS Pharmacy (CVS), BMW, and Mercedes Benz.


When compared to traditional battery based forklifts, Plug Power's GenDrive system blows the competition out of the water. Using a fuel cell hybrid system, GenDrive generates zero greenhouse gas emissions and has shown to reduce site emissions by up to 80%. GenDrive also eliminates operational costs by up to 30%, and frees up building space that would otherwise be used to house the large battery charging rooms used for older forklifts. On top of this, GenDrive increases site productivity by up to 15%, operates at full power until the fuel depletes, and takes a total of 2 full minutes to recharge. For massive companies with distribution centers or warehouses, this product is a no brainer. They can save millions of dollars by replacing GenDrive systems with their current forklifts and pallet trucks, which in effect would reduce costs, increase productivity and minimize their carbon footprint.

With more than 4,000 units shipped to date, Plug Power is finally executing their business plan and expanding into adjacent markets, which is consistent with their long-term goal of displacing lead-acid batteries and diesel engines in a broad array of applications. The company is first targeting markets that have the same dynamics as materials handling. They are currently in the process of developing range extenders for heavy-duty electric vehicles, replacing diesel based transportation refrigeration units (18 wheelers delivering food) with fuel cell based units, and introducing fuel cell powered utility vehicles and baggage tractors used at airports. Being at the forefront of this relatively new and exciting industry, the opportunity here is massive for Plug Power. Considering that Plug's current customers deploy a combined 250,000 forklift trucks, there are more than 6 million forklifts deployed globally, there are more than 290,000 transportation refrigeration units deployed nationwide, and airlines operate more than 60,000 ground equipment vehicles, the upside potential clearly outweighs the downside risk, especially when Plug Power is positioning themselves to become the industry leader of fuel cell products, and is expected to breakeven in the second or third quarter of 2014. Plug Power, selling a total of 4,000 units, and generating yearly revenue of $26 million for the fiscal year of 2012, has barely scratched the surface of their install base.

Take Away From Latest Conference Call

On October 8th, CEO Andrew Marsh provided a business update for the company. The updates given during the conference call were extremely bullish for the long-term prospects of the company, but the stock sold off more than 20% mid conference call due to a miss in sales estimates, and no concrete answer to the looming possibility of a reverse stock split. These two factors should be of no concern to long-term investors who see the true potential in this company.

Since May 15th, the company has booked $11.7 million in orders, which is well below their previously announced expectations of $20 million. However, as bearish as this may seem, there is a silver lining in these numbers. Marsh went onto explain that the miss in sales is only a timing issue, with Plug currently negotiating more comprehensive orders with their present customers. The company expects these transactions to significantly increase revenue, and hopes for them to be completed before the end of 2013. The company is experiencing increased customer traction. Plug Power's customers understand the true need and advantages associated with their products, and are holding off on orders the company expected to be placed, simply to negotiate much larger deals.
The company has also expanded their GenDrive products into a long term service contract. While the company's main focus is to penetrate the market by selling GenDrive systems to customers with forklift trucks, they are now also providing hydrogen infrastructure to the company. Now, Plug Power's revenue consists of 40% product, 20% service, and 40% for the delivery and fueling of hydrogen, for many of the customers that have signed these long-term service contracts. Plug Power is not only a provider of fuel cell products, but thanks to matured relationships and increased trusts with their customers, they are transitioning to become hydrogen providers, with intentions to buy hydrogen in bulk and generate revenue per kilogram of hydrogen sold. This means recurring revenue from customers who purchased their GenDrive system years ago. This is game changing, and will add to the bottom line of the company once this reaches more and more customers, and will provide more predictability for their business as a whole.

Plug Power expects to ship more than 3,000 units at more than 20 sites in 2014. This is explosive growth when compared to the 1,100 GenDrive units that were sold in 2012. Plug Power expects that 50% of these sites will be covered with an extended service contract, providing recurring revenues for the company. As of September 30th, the company has $20.2 million in product and service backlogs.

The company, thanks to their joint venture with Air Liquide that was formed in February of this year and practically saved the company for bankruptcy, has also begun trial runs with customers in Europe under their HyPulsion brand. Ikea will be deploying units in one of their France locations in the fourth quarter of this year. It is encouraging to see the fruits of a joint venture occur with less than a year of existence.

Plug Power is also exploring potential deals similar to the one with Air Liquide that would give them exposure to the Asian market. With limited cash funds, the company does not plan to use their own equity or cash to develop these markets, but will rather rely on partnerships. Expansion into Asia would blow the cap off of this stock, and be just one more catalyst that could attract serious investor attention and help boost the share price.

Lastly, Marsh sees a great deal of opportunity with regards to the transportation refrigeration units (TRUs). Using fuel cells to generate the power used to run the massive 18-wheeler refrigerators results in a massive reduction in emissions, reduced operational cost for fuel, and low acoustic noise, which allows for deliveries to be made during all hours of the day. This can greatly improve the logistics for companies that have operations revolving around TRUs. The expansion into these adjacent markets is cost effective for Plug Power, and will add to the bottom line if sales begin to materialize as they have for their GenDrive system.

Risks Moving Forward

The company has managed to solve huge problems in the past with regards to the direction of the company and with finances and the possibility of bankruptcy. But still, there are many risks to consider. Currently, as has been for years, Plug Power is not profitable. The company has an accumulated deficit of more than $800 million, and incurred net losses of approximately $30 million in 2012, though this is an improvement over the $121 million net loss that occurred in 2008. More importantly (short term), the company will receive a non-compliance letter from the NASDAQ regarding possible delisting for being under $1 a share in the coming days. Once the company receives the letter, they will have a hearing with NASDAQ within 30 to 45 days. Management will present their case for why the stock price will move over $1.00 on its own, and will then either be granted a 180 day extension, or will be denied extension and be delisted in 10 days time. At that point, the company would initiate a reverse stock split to remain on the NASDAQ. However, the company believes that increased orders from large customers, and diversifying their business into service solutions and providing hydrogen, will help boost their stock price above $1.00. In any light, this is a big, near term risk for investors and those who are extremely risk averse should avoid this company until either a reverse split commences or the stock reaches sustainable levels of above $1.00.

With regards to Plug Power's business model, the one real factor that is holding back a massive transition from diesel and battery based forklifts to fuel cell bases is the initial costs of the system. When I contacted the company, they informed me that they want to keep the price of their products as private as possible, so one has to assume that the initial costs of a GenDrive system can be costly, especially with regards to the hydrogen infrastructure that needs to be installed to fuel the lifts. Based off of revenue from the company and the amount of GenDrive units sold, and the fact that battery based forklifts cost anywhere from $3,000 to $6,000, it is safe to assume that a GenDrive unit from Plug Power costs upwards of $15,000, possibly even more than $20,000. These costs may seem extremely daunting for companies, especially smaller scaled companies. Though the cost savings are massive, it may be difficult for companies to commit to such a product. Until the cost of hydrogen infrastructure comes down, this high cost will act as a barrier that is preventing wide spread adoption of these fuel cell-based units. However, do not expect these costs to scare away massive companies, as many Fortune 500 companies have been extremely enthusiastic about the product and its cost advantages.

Conclusion

The long-term, strategic outlook for Plug Power is stronger than ever, and the recent sell off during Tuesday's conference call presented an exciting opportunity to get into this stock at attractive levels. There is key support at $0.54, where the company priced its latest stock offering. Any announcement of a large order placed by a massive company, a materialization of their planned expansion into Asia, further developments or funding from interested parties (government, companies) regarding the transportation refrigeration units, or an avoidance of a reverse stock split and a granted 180 day extension from NASDAQ, will help boost the company's share price and long-term stability. With many insiders recently purchasing stock, impending profitability in the middle of 2014, and a stellar product offering overall, the bullishness behind Plug Power and its long term potential seems to be justified, and investors who jump in now should stand to be handsomely rewarded come 2014. Look for any of the above catalysts to be announced on November 14th during the company's third quarter conference call, December 11th during analyst day for Plug Power, January 14th for an investor update, February 19th for a second investor update, and a date to be announced in March for the company's year-end conference call. With all of these scheduled updates, a lot seems to be brewing for a company that is currently valued at a meager $56 million, compared to there once lofty valuation of more than $6 billion.

All information was sourced from: latest conference call, latest investor presentation, and latest 10-k filing.

The Nokia/Microsoft Saga that has unfolded over the past four weeks has sent shockwaves throughout the investing, technology, and Finnish community. The swift, some would argue inexpensive, acquisition by Microsoft (MSFT) has left many wondering what a phoneless Nokia (NOK) would look like, and questioning how profitable their remaining operations will be. Most commentators, including myself, have poured their focus towards Nokia's patent portfolio, Here Maps, and Nokia Solution Networks. While I understand that these three divisions are imperative to the ultimate success of Nokia as a whole, I believe there are many more crucial layers to Nokia's stock price appreciation that must be addressed, including an impending dividend reinstatement, and the inevitable return of Nokia branded smartphones, which will give Nokia the chance to regain their spot as the number one phone manufacturer in the world.

The Dividend

Not too long ago, Nokia paid a dividend. Seems like ages ago, doesn't it? It's been ten months since Nokia suspended their quarterly dividend, which was the first time in 143 years. The suspension of Nokia's dividend was a necessary move that helped buy Nokia more time to return to profitability.
The suspension drove away many dividend-oriented investors, and drove down its stock price, with shares falling more than 9% after the announcement was made. At the time, Nokia was inching towards the edge of profitability, and their mobile devices division was burning a large hole in their pocket every single quarter, spooking many analysts and credit rating agencies.

Fast-forward ten months, and Nokia's divestment of their profit burning division has resulted in a cash infusion of more than $7 billion. Once the deal is approved, Nokia will have more than $20 billion is gross cash, and will be sitting on more than $10 billion in net cash. Group this together with the expected 7%-11% operational margin of Nokia Siemens Network, and expected annual cash flows of more than $1 billion from Nokia's patent portfolio, and the likelihood of a reinstated dividend seems stronger than ever.

Nokia managed to go from rags to riches in the matter of a handshake, turning into a miniature cash cow overnight. It only seems likely that Nokia rewards its shareholders for holding on through the thick and thin with either a special dividend, a reinstated dividend, or both. I believe both will occur. From Nokia's announcement presentation, it states, "After the evaluation (of Nokia's future strategy) is complete, deemed excess capital is planned to be distributed to shareholders." Any such announcement from Nokia would result in a surge in Nokia's share price, possibly similar to the amount shaved off when it was suspended, 9%. A reinstated dividend would bring back dividend-oriented investors, attract new ones, and reaffirm the positive outlook for Nokia as a whole.

The Earnings Report: Why Lumia Sales Are Crucial

Nokia's upcoming earnings report on October 29th will shed an extreme amount of light on Nokia's remaining divisions and management's vision for the future and strategy for the company. However, a lot of potential in the earnings report lies within Nokia's Lumia sales. The company moved 7.4 million Lumia units last quarter, and with the Lumia 1020's extensive marketing campaign and associated 'halo effect,' new iterations of low entry phones (Lumia 625), an almost 10% market share in Europe, and recent product releases in the Chinese market, I would not be surprised to see more than 10 million Lumia units being sold. This would be a big surprise to most analysts and investors, and would lead many to question the metrics behind the Microsoft/Nokia deal, and who was actually getting the short side of the deal. A strong uptick in Lumia sales and profitability of Nokia's phone division would result in a lot of pressure from Nokia shareholders to see an increased take out bid, which would result in a strong surge of Nokia's share price. A profit warning from Nokia in the coming weeks would be a step in the right direction.

The silver lining is that if Lumia sales disappoint, it should have a minimal effect (if any at all) on Nokia's share price, and will soon become Microsoft's problem. The risk/reward scenario is extremely favorable for Nokia shareholders going into earnings.

2016: Everybody Loves A Comeback Story

Nokia will be having a grand celebration on December 31, 2015, and not just for ringing in the New Year. Nokia will once and for all be able to remove the shackles that were imposed on them by Microsoft under the terms of their agreement. The ability to begin producing and selling Nokia branded phones, running Windows Phone, Android, or both after December 31, 2015 will present a booming opportunity for Nokia. Nokia's impending two-year break from the smartphone market will give the company plenty of time for reflection. Reflection and development. Nokia has two years to learn from their mistakes and right their wrongs, and the potential comeback could be massive. If Nokia can retain a hardware team to still dream up sleek, solid, and innovative phone models, then Nokia will become a behemoth in the industry once again, reclaim their spot as the number one phone manufacturer, and give Apple (AAPL) and Samsung (SSNLF.PK) a run for their money. With both Samsung and Microsoft setting up shop in Finland, I don't think it will be difficult for Nokia to scout the necessary talent.

The thought of Nokia selling both Windows Phones and Android devices alone justifies a stock price higher than $6.70 in my opinion. Add on a massive patent portfolio, Here Maps, NSN, and a boatload of cash, and you're talking about a stock that should be valued more than double what it is at today (and that's extremely conservative). For the next two years, Nokia can focus its efforts towards profitability and growth with its three business divisions, while Microsoft works on, develops, and grows the Windows Phone platform. Come 2016, the Windows Phone platform will feature a more robust ecosystem, with a much larger user install base than today. Microsoft is doing all of the dirty work, and Nokia will be back when Windows Phone at its height, with the ability to release a new phone line up and directly compete against Microsoft and other Windows Phone vendors.

Nokia's possible re-entry into the phone market should be in the back of every shareholders' head. Though two years sounds like an eternity from now, the true effects of a new, profitable Nokia phone division that runs both Android and Windows Phone is unfathomable at the moment, yet the date is just around the corner.

Join The Party Alcatel

Rumor has it that Nokia is considering a tie up with Alcatel Lucent (ALU), either in the form of a Joint-Venture, or through an outright acquisition of Alcatel's wireless unit, which the company has been trying to sell ever since Michael Combes unveiled his turnaround strategy for the company back in June. Nokia's board has been pondering a tie up with Alcatel since as early as 2012. Nokia Solutions Network would have a combined market share of 25-30% if they acquired Alcatel, and would be a formidable competitor to the industry leader, Ericsson (40% market share). This hypothetically combined company would have received almost a quarter of China Mobiles' latest $3.2 billion contract offering for TD-LTE base stations.

The synergies between NSN and Alcatel are present, as is the likelihood of such a tie up creating long-term shareholder value, though different technological equipment and networks would prove to be challenging for the new company to integrate and would threaten the effectiveness and efficiency of the company throughout the beginning stages. Also, with a recent stock price appreciation of almost 45% since the Nokia/Microsoft deal was announced, it may be a bit pricey and too soon for Nokia to acquire Alcatel. But if Nokia is able to strike a deal with Alcatel's wireless infrastructure for the right price, then the long-term outlook of NSN and Nokia as a whole gets stronger, and should help move the needle for Nokia's bottom line.

Risks

Nokia has a bright future to look forward too, yet there are still some risks every investor should consider, however small they may be. Firstly, Nokia is still in dispute with the Indian government over a tax bill for more than $300 million in income. Indian authorities have recently frozen some of Nokia's assets, including their bank accounts in the country. If Nokia is unable to settle this tax dispute with India in a timely manner, it may cause a delay in Microsoft's acquisition of the company, and Indian officials, who are desperately searching for taxable income, may play hardball with Nokia and Microsoft. Any delay in the merger between Microsoft and Nokia is a risk to current Nokia shareholders and would mostly result in a drop for Nokia's share price.

The upcoming shareholder meeting on November 19th may cause negative pressure on Nokia's stock price if shareholders disapprove the merger. This is highly unlikely, yet very possible, especially if Nokia surprises with Lumia sales. If Nokia shareholders do not approve of the Microsoft deal, then Nokia will receive a termination fee from Microsoft and Nokia will be required to pay Microsoft more than $100 million.

Lastly, if Nokia does go through with a merger between them and Alcatel Lucent, I'd expect to see negative pressure on Nokia's share price in the short term. The deal, which would be sweet for Alcatel Lucent, would require a lot of capital from Nokia, and many investors would challenge the feasibility and rationalization behind a merger between the two. While I believe in the long run a tie up between the two companies would create tremendous shareholder value for Nokia shareholders, it may take time for the company and its share price to experience the positive effects of such a merger.

Conclusion

Although Nokia has rocketed almost 70% since the buyout announcement, it's not too late to open a position in the company. There are simply too many positive catalysts that can substantially drive the share price higher, and recent analyst upgrades are only increasing Nokia's momentum. Following the uptrend pays off, and Nokia has a lot more room to climb. Plenty of investors think so as well, with a lot of high options volume occurring recently. On Thursday, October 3rd, Nokia saw an increase of 168% in trading of call options, with investors acquiring 12,085 call options. The next day, Nokia call options saw an increase of 271% in volume with investors acquiring 20,229 call options. This activity is startlingly similar to the unusual call option volume that occurred just prior to the announcement of the Microsoft/Nokia deal. Investors who have a long-term mindset should be opening a position in Nokia at these levels, there are too many positive catalysts to ignore this stock.

Sources Include: Microsoft's announcement presentation, Nokia's announcement presentation

Castle Brands (ROX) has provided extraordinary returns ever since I first highlighted the company in a previous article, which revolved around Phillip Frost's open market stock purchases. In less than two months, the company's stock has appreciated by more than 110%. Because of my position in Castle Brands, and the company's swift stock price appreciation, I believe a more thorough analysis of the company is appropriate.

Overview

Castle Brands, Inc. offers a premium selection of different alcoholic beverages. Their most notable beverages include Gosling's Rum, Gosling's Dark 'n Stormy ready-to-drink cocktail, and Gosling's Ginger Beer (non-alcoholic). The company also sells premium whiskey, vodka, tequila, wine, and a variety of liqueurs. The company is headquartered in New York City, was formed in 1998, and filed for its IPO in 2006 at $9.00 a share. Since then, the stock has been battered year after year. The chart below paints a crystal clear image of the catastrophe.


And for good reason, this company has failed to achieve profitability since their inception! However, the company's robust growth, strategic acquisitions, and solid management have Castle Brands inching towards profitability, ever so slightly, and they should achieve profitability very soon. While it's too late to get into the company at the same prices as insiders like Phillip Frost, it is not too late to get in before the turnaround actually materializes.

A Look Back

At the end of Castle Brand's 2005 fiscal year, before their IPO, the company recorded sales of 170,060 cases of all beverages combined, which represented revenue of approximately $12.6 million. This was a 161% increase in revenues compared to their 2004 fiscal year. By 2005, the company had invested more than $60 million in capital to develop their operating platform, acquire and grow premium spirits, and establish sales and distribution throughout the U.S. and abroad.

Shortly after going public, investors realized that although the company was growing at an alarmingly fast rate, the company had messy management and miniscule revenues to justify a more than $30 million market cap. Realizing that the company wouldn't reach profitability for a long time coming, with consistent negative earnings and an accumulated loss of $40 million, the stock sold off hard. In less than three years, the stock went from $9.00 to $0.20. Once the dust settled, Castle Brands restructured their operations abroad, changed around management, and brought in a new President and CEO.

The Current State Of Castle Brands

Fast-forward to the present, and you'll find that Castle Brands is a much larger company than before, and quite stable. For the fiscal year ending in March of 2013, Castle Brands revenue stood at $41.4 million, an increase of 16.8% when compared to 2012, and more than 350% when compared to revenues in 2005. The company sold 372,059 cases of alcohol in 2013, which represented an increase of 12% when compared to 2012, and more than 120% when compared to cases sold in 2005. Gosling's Rum and Jefferson's Whiskey has consistently been the driver behind growth. Gosling's Rum accounts for 41% of cases sold. This solid, steady growth is derived both organically and through the strategic acquisitions of premium brands.

While the company has grown tremendously over the past few years, they have also taken on more debt. A lot more debt. Currently, the company's accumulated deficit and total liabilities stand at $130 million and $20 million, respectively.

What's encouraging is that the company expects administrative and operational expenses to decline due to large economies of scale being reached. As Castle Brand's sales continue to grow, their operational and administrative expenses are either remaining constant or decreasing. Castle Brand's gross profit margin increased by 14.3% in 2013, and their adjusted EBITDA improved by almost 70% year-over-year, with a loss of $741,000, compared to $2.4 million in 2012.

Steps Towards Profitability

The company's overall objective is to continue building a distinctive portfolio of global premium and super premium spirits brands as they move towards profitability. Management plans to do this by increasing revenues from their more profitable brands, improving value chains and managing cost structure, and by selectively adding new premium brands to their portfolio.

Castle Brands seems to be following these initiatives. The company's most profitable brand, Gosling's Rum, continues to grow and increase revenues year after year. The company is shifting their focus from selling less profitable premium wine, in order to focus on their faster growing and more profitable spirits brands, and to reduce operational costs. The company is reducing core operational costs through supply chain efficiency and reaching larger economies of scale. Lastly, through strategic acquisitions, Castle Brands is able to significantly boost shareholder value.

Though Castle Brand's last strategic partnership occurred back in 2011 with the Distillerie Franciacorta, management is constantly keeping an eye out for strategic mergers and distribution partnerships. The company's small size allows them to offer flexible and creative structures for small, premium, family owned spirits brands that are interested in partnering with a beverage company that has an established global distribution network. Castle Brands has an extensive network of industry contacts and at the same time is extremely small and accommodating, which makes them a more attractive company to partner with than a larger sized beverage company.

Portfolio Highlights


Castle Brands holds a diversified portfolio of premium spirits, and when focusing in on each brand separately, the story behind Castle Brand and their comeback becomes more and more bullish. The first premium spirit that is truly the foundation of Castle Brands is Knappogue Castle Whiskey 1951, which founder Mark Andrews inherited from his father. The 36-year-old aged whiskey is the oldest and rarest Irish whiskey in the world. 60 bottles were released in 2008 to celebrate the company's 10 year anniversary. Currently, the average price of a 750 ml bottle, excluding tax, is $1,285.

Knappogue Whiskey may be the foundation of Castle Brand's Inc., but Gosling's Rum is the true driver behind the company. Castle Brands owns 60% of Gosling-Castle Partners, and has the exclusive rights to distribute the product globally. Castle Brand's has increased sales from 35,000 to more than 150,000 cases since the tie up occurred back in 2005. The company's latest product launch was in 2012 with their Darn n' Stormy ready to drink cocktail, a mixture of Gosling's Rum and ginger beer. The drink added $600,000 in revenue for its first year, and management expects to sell more than 140,000 cases this year. Gosling's is well positioned for continued, substantial growth, and the recent launch of the Dark n' Stormy will only add to this.

Jefferson's Bourbon has become a success in the "small batch" segment of bourbon. There are multiple line extensions of Jefferson's, including Jefferson's Reserve, Jefferson's Rye, and Jefferson's Presidential Select. Jefferson's is highly profitable and is the company's second fastest growing brand, behind Goslings. The brand is 100% owned by Castle Brands and was acquired in 2006. Sales increased from 40,000 cases in 2012 to 53,000 cases in 2013.

Boru Vodka is a high quality liquor that is comparable with other premium vodkas. The drink is produced in Ireland, and has won numerous awards in the industry, including top awards for best liquid and best packaging. The company competes in a rapidly growing vodka market that sells more than 12 million cases every year. Boru is a small player in this market, with case sales sitting at approximately 70,000 for 2013, and their main competitors are Smirnoff, Skyy, and Svedka. While the brand faces intense competition, total margins continue to increase thanks to management's focus on targeting Boru Vodka's most profitable markets and through efficient inventory management. The brand was acquired in 2003 and Castle owns 100% of it.

In 2004, Castle Brands gained exclusive U.S. distribution rights for Pallini Limoncello and its related products. U.S. sales increased from 5,000 cases to more than 35,000 cases since the tie up. Pallini Limoncello is the top selling premium limoncello brand in the U.S., is the largest liqueur category in Italy, and is rapidly growing in the U.S. Castle Brands expects this brand to continue strong sales growth.

Castle Brands distributes two different brands of Irish Whiskey, Knappogue and Clontarf. Knappogue is an aged, single malt whiskey (minimum of 12 years), while Clontarf is a blended Irish Whiskey. They are both premium in the sense that they are triple-distilled and aged in bourbon barrels. Knappogue is more aged, and therefore, a bit more expensive. Irish whiskey is the fastest growing segment of the whiskey market, there are significant barriers to entry, and the continued growth of Jameson's only benefits these brands, because a portion of consumers want premium alternatives to the mainstream choice. Castle owns 100% of both brands, and management anticipates substantial growth over the next ten years for this segment.

Moving Forward

Castle Brand's is teetering on the edge of profitability. In 2012, the company forecasted that they would see positive adjusted EBITDA if they reached revenues of $41.4 million. They reached those levels this past year yet did not see positive EBITDA, but if you look a little bit closer, there is a silver lining. In March of 2013, Castle Brands decided to reduce their sales and marketing efforts on their wine brands, which never provided a material contribution to their bottom line. The company recognized a loss of $1.7 million, consisting of good will, intangible assets, and obsolete inventory related to their wine business. If it weren't for the wine write off, Castle Brands would have seen a positive adjusted EBITDA of $973,911. With strong, rapid growth, I strongly expect to see Castle Brands record a profit of more than a million dollars for their 2014 fiscal year, ending in March of 2014. For a company that has yet to turn a profit in more than 14 years of operation, this is a big deal.
An even more bullish note I took away from Castle Brand's most recent 10-K filing revolves around their financing under the Keltic Facility. Recently amended in March of 2013, Castle Brands has secured a revolving loan agreement between Keltic Financial for $8 million. This loan commenced in 2011, beginning with $5 million, and has subsequently increased in 2012 and 2013. Keltic Financial focuses on lending money to small and mid cap businesses that are poised for substantial growth. The company lends anywhere from $1 million to $10 million to these businesses.

Castle Brand's has borrowed $6.5 million of the available $8 million, leaving $1.5 million left for the company to utilize for operational needs. According to their 10-K filing, management strongly believes that their current cash position, working capital, and remaining funds from the Keltic Facility will enable them to fund their losses until they achieve profitability, ensure continued supply of their brands, and support new brand initiatives and marketing programs until at least March of 2014. Castle Brands will see profitability before March of 2014, and should start to slowly lean off from being financially propped up as their balance sheet starts to slowly turn green.

Experienced Management

It seems that there is a tight knit management group revolving around billionaire Dr. Phillip Frost. The President and CEO of Castle Brands, Richard Lampen, is also the President and CEO of Ladenburg Thalmann Financial Services, and is the Executive Vice President of the Vector Group. Chairman and founder of Castle Brands, Mark Andrews, was a former director of IVAX Corp (from its founding) until its eventual sale to Teva Pharmaceuticals. Frost has/had a significant position in the above companies. Andrews also founded a natural resources company in the 1980's that went public and was eventually sold to the Louis Dreyfus Natural Gas Corp. John Glover, COO of Castle Brands, holds an MBA from Dartmouth College, served as marketing director for Smirnoff, and served in various roles in marketing and commercial management with International Distillers and Vintners before it merged with Diageo. Kelley Spillane, Senior Vice President of sales, has more than 25 years of experience in spirits sales, and held senior sales roles during the rise of Absolut and Grand Marnier.

Besides management's impressive backgrounds, they are also extremely confident about the company. Insider buying has occurred throughout 2012 and 2013, and altogether, officers and directors of Castle Brands own approximately 50% of the company's shares. Phillip Frost was the last director to buy the stock, for a mere $0.27 and $0.35 back in March and July of 2013, respectively.

Conclusion

The stock price recently broke out of its 7 year downtrend and is now on the rise. Eventual profitability, most definitely coming by March of 2014, will help boost this stock above the $1.00 range and break through the $0.99 resistance that was touched last month.

Castle Brands is a micro cap stock, the company has yet to turn a profit after 14 years of operations, and they have an accumulated deficit of more than $130 million. There is a lot of risk associated with this stock, especially with liquidity and dilution concerns. But with profitability right around the corner, experienced management, and substantial sales growth, these risks should subside as time passes. The company has a strong portfolio of premium brands, and has strong potential for developing a break-out brand success and attract new premium brands.

The stock price recently broke out of its 7 year downtrend and is now on the rise. Eventual profitability, most definitely coming by March of 2014, will help boost this stock above the $1.00 range and break through the $0.99 resistance that was touched last month. Long-term investors who have a stomach for risk should consider starting a position in Castle Brands.

All information was sourced from Castle Brand's latest 10-K filing and from their 2012 presentation at the Sidoti Semiannual Micro-Cap Conference. Also, from Nasdaq's IPO summary.