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OTC Journal Members:
Thus far in 2001 the OTC Journal
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.
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
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.
Profile: Neptune Society (OTC BB: NTUN)
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.
Stock Listing: OTC BB: NTUN (NTUN.OB
Shares Issued and Outstanding:
Estimated Public Float: 5.5 million
Closing Price and Volume: $6.20 on
Market Capitalization: $47 Million
52 High and Low: $14.45/$1.52
Web Site: http://www.neptunesociety.com
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
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
As depicted in this chart, both Neptune
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
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
Cremation is a simple and dignified
death care option.
Economical ($799 to $1299 vs Traditional
Death Care which averages $7,000)
More diversified cultural mix in the
Allows family more options in determining
type and place of ceremony and honoring memory of loved one.
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:
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
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.
contract sales volume up 76%
transaction volume up 58%
sales (non-US GAAP) up 67%
profit up 100%
profit % up 17%
& deferred earnings
interest,taxes, depreciation and amortization (non-US GAAP) up $796,099
Here to read the entire text of the press release.
After taking out non cash expenses,
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.
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
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
million in 1990. It is expected to grow to nearly $50 million
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
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.
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.
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.
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
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
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.
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