Business Description
Matrixx Initiatives Inc. (MTXX) develops, produces, markets and sells innovative, over-the-counter (OTC) healthcare products with an emphasis on those that utilize unique, novel and/or proprietary delivery systems that provide consumers with “Better Ways to Get Better ® .” Through our subsidiaries, we market and sell products under the Zicam ® brand. Their offerings are
(1) cough and cold category: Cold Remedy
(2) Allergy/Sinus
(3) Cough and Multi-Symptom relief; and other cough/cold.
Current Events
If anyone watched CNBC or read WSJ in the last month (June 16, 2009), ZICAM was attacked about their swab and nasal injection security. Why? FDA said hey you guys have a big problem; there have been complaints about people losing their smelling ability. So the stock was really hammered:
The stock went down from around $20 dollars to about $5, roughly 70%. Why did it decrease so much?
(1) Smart money left and people over reacted because of FDA letter, creating a huge drop in price.
(2) There are two questions regarding Esco’s future. Since there cold remedies contribute about 71% of there sales, how will this affect the top and bottom line of the company.
Therefore, the biggest unknown is how much this will affect the sales, and also how much can they cut down their sales. This will clearly affect their earnings potential. So I mapped out a couple of scenarios, all of which do not look very well. To keep it conservative, I am going to assume sales will decrease 40%, and recurring expenses are around where they are, which gives me an earnings that is negative that will equate to negative cash flow. Fortunately, the company has a $8MM revolver that ends July2009, assuming they do not extend it. Though I do not think this negative earnings will continue on a long term basis, I am not comfortable holding this security anymore and sold the majority of my position (I bought shares that averaged around $4.70.)
Some people thought I was crazy, and my investment thesis was quite simple because people were overreacting about the news the stocks traded below their net-net working capital. Looking at worst case scenario, the company will file bankruptcy and liquidate— which is highly unlikely. If the firm was to do so, the firm would liquidate their assets. I calculated the net-net working capital, which is a current liability minus total liability (no long term debt). Out of their whole current assets, 60% is cash and short term investments (money market), which mean their current assets, are quite liquid. At a net-net working capital per share of $5.22 and buying at an average price of $4.70, this was a no brainer. I was only looking to pick up a quick 10-11% because people were overselling the security, and ended up with a 22% gain.
I would not be surprised if the net working capital per share level is retested, but thought it was an interesting + positive story for a company that is not having the best of news this past month.
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