Newsletter

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June 29, 2001
Volume IV, Issue 58
Email : info@otcjournal.com
URL : http://www.otcjournal.com

To OTC Journal Members:

Thus far in 2001 the OTC Journal has only introduced two new profiles. We are being very selective, and making every effort to maximize the upside potential while choosing speculative growth companies with minimal downside risk.

This month's profile is one of the most intriguing companies we have ever looked at. We believe the stock has the potential to double over the next six to twelve months with only a possible 20% downside risk. Moreover, based on today's closing price, the stock could be positioned for a short term move to $9 in sympathy with other surging stocks in the group. The former editors of the OTC Journal first reported on this company in October of 1999. Recent corporate events have generated major resurgence in interest in this stock.

If you like companies with positive cash flow, high margins, and predictable future sales then read on. If you like companies with a competitive demographic advantage, read on. If you like companies with substantial hidden assets, read on.
 

Increasing Visibility

The demise of the dot-com era has brought a return to value investing. Industry groups that have been out of favor for years have trended up dramatically in the last 12 months. Sin stocks (alcohol and tobacco), energy, health care and pharmaceuticals have done well. The market likes value again.

Traditional industries are back in vogue, and the entertainment industry has helped lead the way. HBO has enjoyed phenomenal success with its unusual offering of weekly shows. The Sopranos is one of the highest rated shows on TV, and the summer run of Sex in the City is the most popular show on TV.

HBO has launched a new black comedy this summer entitled Six Feet Under. The show is about a family owned funeral parlor. It is strategically placed just after Sex in the City, virtually guaranteeing a huge audience. Clearly they believe it will be a big hit. Why not???- it's a lighthearted look at something difficult all families deal with.

The death care industry is now on the radar screen of both Hollywood and Wall Street as our attention turns back to innovative companies in centuries old businesses. The company we are featuring this month has developed a new way to profit from a business which has been with us since the dawn of time, and Wall Street is loving it.
 

June Profile: Neptune Society (OTC BB: NTUN)
  • Stock Listing: OTC BB: NTUN (NTUN.OB on Yahoo)
  • Shares Issued and Outstanding: 7.6 million
  • Estimated Public Float: 5.5 million
  • Closing Price and Volume: $6.20 on 469,000 shares
  • Market Capitalization: $47 Million
  • 52 High and Low: $14.45/$1.52
  • Web Site: http://www.neptunesociety.com
Neptune Society has taken an age old business, focused on one specialty area, and implemented modern marketing techniques. This has resulted in stellar growth in both sales and earnings, a goal not easily achieved. Of the seven publicly traded Death Care companies, Neptune Society is the only one which exclusively offers cremation services.
 
Brief History

Neptune Society was founded in 1973. The company expanded through a series of highly profitable limited partnerships. In March of 1999 the entire company was acquired in a leveraged buy out for a total purchase price of $27 million.

Shortly after becoming a public company in 1999 Neptune Society found itself embroiled in an industry wide upheaval of accounting practices triggered by the SEC. This 18 month process has caused the stock to trade at 1/2 the price it was in most of 1999 and 2000, thereby creating an exciting opportunity for investors.

Stocks of the entire industry group were virtually obliterated by Wall Street during this process. Service Corp (NYSE: SRV) traded to a high of $44 per share in mid 1998. In the last 52 weeks the stock's low was $1.56. The chart shown depicts just how much these companies are coming back in favor, with Neptune yet to make its potential run.

With all the issues resolved Service Corp has been a very hot stock this year, currently up 280% from the low, and up 373% from the January low to this year's high.

Service Corp recently completed a $300 million financing of convertible subordinated notes led by Merrill Lynch, and on June 19th Merrill Lynch issued an accumulate rating on the stock.

Neptune Society, after a 2 year process which burned up nearly $2 million in legal and accounting fees, finally resolved their accounting changes with the SEC, and were granted fully reporting status via the approval of a Form 10 filing on June 14th. We expect the company to apply to upgrade their listing to either the NASDAQ or the American Stock Exchange in the very near future.

As depicted in this chart, both Neptune and Service Corp have traded very well since the 1st of May, but Neptune has upside to nearly $9 before it can close the gap with Service Corp.
 
 
 
 

Competitive Demographic Advantage

As demonstrated in this graph, cremation is by far the most common form of disposition in other cultures. In 2000 only 30% of US death care cases opted for cremation. Based on current trends the percentage will grow to 40% by 2010, and 50% by 2020. Neptune Society is the only company positioned to benefit dramatically from this trend.

This trend is being driven by the following factors:

  • Cremation is a simple and dignified death care option.
  • Economical ($799 to $1299 vs Traditional Death Care which averages $7,000)
  • Environmentally Friendly
  • More diversified cultural mix in the aging population.
  • Allows family more options in determining type and place of ceremony and honoring memory of loved one.
Financial Performance and Growth


 

This chart demonstrates Neptune has nearly doubled its volume of annual transactions since 1998. The company offers services in 35 major metropolitan areas from 16 locations. Growth strategy includes both acquisitions and opening in new markets. Two new locations are expected to open during 2001. There may be additional growth by acquisition. Two have been completed since the company became publicly traded in 1999.
 
 

Here is an excerpt from the company's press release concerning its March quarterly financial performance:
 

Management believes that other indicators of growth and progress of Neptune Society's performance include transaction volume and non-refundable sales (sales for which the customer has no refund or cancellation rights even though these sales may not be recognizable as revenue under the new accounting policies and US GAAP). Below are selected financial and operational results for the quarter ended March 31, 2001 compared to the same period in the prior year: 
  • Pre-need contract sales volume up 76%
  • Total transaction volume up 58%
  • Revenues up 68%
  • Non-refundable sales (non-US GAAP) up 67%
  • Gross profit up 100%
  • Gross profit % up 17%
  • Earnings & deferred earnings
  • before interest,taxes, depreciation and amortization (non-US GAAP) up $796,099
While other major death-care industry companies reported declining transaction volumes and top line revenues during the first quarter compared to the same period in 2000 due in part to declining mortality rates, Neptune Society experienced increased transaction volume across all product lines. Pre-need contract sales volume increased 76 percent overall, with existing offices accounting for 41 percent of the overall increase. At-need case volume increased 46 percent over the same period last year, with existing offices accounting for 13 percent of the overall growth.
Click Here to read the entire text of the press release.

After taking out non cash expenses, Neptune Society managed to earn nearly $200,000 in operating profits from 1st quarter operations. The company also incurred $175,000 in professional fees during the quarter, most of which were associated with resolving the SEC accounting issues. Without the burden of these legal and accounting expenses, the company would have probably made $365,000 in cash, or over $.05 per share in net earnings.

The company generates sales from three primary sources: At-Need (a "walk-in" service); Pre-Need (people contracting in advance of need for services and purchasing associated merchandise at the time of sale); and  Pre-need Fulfillment (the eventual use of a pre-need contract).

As mentioned earlier, Neptune Society is the only company we know of which already has its next 10 to 15 years of business in the bank.
 

The Pre-Need Trust Fund

Neptune Society sells 2 Pre-Need contracts for every at-need contract, which is 10 times the industry average. Therefore, their future business is growing twice as fast as their current business.

Depending on minor differences in state regulations, approximately 50% of the money from a pre-need sale goes into an independently managed Trust Fund in order to insure funds are available to provide the service at the fulfillment of the contract.

Pre-need contracts run approximately $1200 t0 $1400. About 50% of the revenue goes into the trust fund, and is withdrawn with interest when services are eventually provided.

As depicted in the graph, the Trust Fund has grown to nearly $40 million at this time, up from $2 million in 1990. It is expected to grow to nearly $50 million in 2002.

Neptune Society does not carry the Trust Fund as an asset on its books, making it a very valuable hidden asset. However, Neptune receives a 4% annual management fee from the trust. This fee alone covers nearly 15% of the company's annual operating expenses. Therefore, without opening their doors, Neptune has 15% of its annual costs covered.

From original purchase date Pre-need contracts average thirteen years to fulfillment. Over the course of 13 years the money in the Trust can double and triple even when invested very conservatively, yielding even greater profits for the company.

56,000 pre-need contracts are in the Trust at this time. This Trust fund represents an on-going, reliable revenue stream for the company, and a guaranteed source of future revenues as the contracts are fulfilled.
 

Competitive Marketing Advantage

Neptune has developed and deployed a highly effective marketing strategy which has been improved in the last two years under the direction of aggressive new management. The most effective advertising to date has been highly targeted direct mail. Neptune will send out 6 million direct mailer pieces this year.

Current management implemented a telemarketing center in Phoenix Arizona employing 20 full time employees. They follow up mailers with phone calls, and are currently setting up 1300 appointments for Neptune sales people monthly.

Once a prospect has agreed to an appointment, the Neptune sales force closes 9 of 10 homes they enter.
 

Final Overview

  • Death Care stocks have had a great year, led by Service Corp (up 280% off its low). Neptune is the smallest company in the group but has the highest growth rate. The stock needs to trade to $9 to close the gap with Service Corp (50% gain from today's closing price).
  • The company is currently enjoying about $125,000 monthly in positive cash flow, adding about $500,000 net monthly to the Trust Fund, and performance is improving.
  • Future demand for services is insured by major demographic advantage as the baby boomers age and a higher percentage opt for cremation as a choice.
  • For nearly all of 2000 the stock traded in the $12 to $14 range during the long and painful process of changing their accounting policies, about 50% of today's price.
  • Growth in sales and profits is exciting with revenues up 68% in the March quarter as compared to the same quarter in 2000. Operating profits were over $200,000, up from a loss of $800,000 in the same quarter the previous year.
  • The company has its next 10 to 15 years of sales already in a Trust Fund, guaranteeing substantial future sales
  • The company has 15% of its annual corporate overhead covered before opening its doors.
  • The stock is rebounding towards its 2000 level of $12 to $14. The low market capitalization of only $56 million makes it the best value in the Death Care group.
Neptune Society (OTC BB: NTUN) closed at $6.20 today. The stock has been trading very well since ending its 18 month long ordeal with the SEC was resolved in the company's favor on June 7th. We believe odds are the stock is more likely to see $8 before it ever sees $5 again. In our opinion, Accumulate up to $7 for the big move to $12 to $14.

Charts Provided Courtesy of TradePortal.com


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Disclaimer
The OTCjournal.com Newsletter is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. All companies are chosen on the basis of certain financial analysis and other pertinent criteria with a view toward  maximizing the upside potential for investors while minimizing the downside risk, whenever possible.  Moreover, as detailed below, this publication accepts compensation from certain of the companies which it features. Likewise, this newsletter is owned by MarketByte, LLC. To the degrees enumerated herein,  this newsletter should not be regarded as an independent publication.

Click Here to view our compensation on every company we have ever covered, or visit the following web address:  http://www.otcjournal.com/disclaimer.html for our full profiles and http://www.otcjournal.com/trading-alerts/disclaimer.html for Trading Alerts. MarketByte LLC has been paid a fee of $100,000 in cash and 50,000 shares of free trading stock for representing Neptune Society for a period of one year. The fee has been paid by BG Capital Group on behalf of the company. Please review our policy on selling shares found within our Mission Statement at our home page.

All statements and expressions are the sole  opinions of the editors and are subject to change without notice. A profile, description, or other mention of a company in the newsletter is neither an offer nor solicitation to buy or sell any securities  mentioned. While we believe all sources of information to be factual and reliable, in no way do we represent or guarantee the accuracy thereof, nor the statements made herein.

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The OTC Journal Newsletter is an electronic publication committed to providing our readers with useful information on publicly traded companies. The Newsletter contracts with publicly traded companies and receives compensation from them or third parties as payment for publishing information and opinions about the company and the trading market for their securities. Principals of the Newsletter may also purchase or sell securities of the companies in the open market from time to time. The positions, if any, that the Newsletter or its principals presently maintain in the securities of the companies are disclosed here (click here) and should be considered in making an investment decision regarding these companies securities. The Newsletter and its principals reserve the right to acquire additional shares or liquidate some or all of the positions they may hold in the issuer’s securities at any time in the future without further notice. These publications should not be considered to be independent publications concerning the company.

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