07/08/2007
VOLUME 307
Companies featured in the current edition of the newsletter: ARGA, CGXP, CHIP, HSOA, HYTM, IWEB, OXIS, PCLI, RTK, RVEP, USAT, VOII
The first week of the new quarter began where the second quarter ended, with strong economic data fueling a significant move higher for stocks. The holiday shortened-week ended with the Dow rising 203 points, raising yearly gains to 9.2%. The Nasdaq was up 63 points for the week, increasing its year-to-date performance to 10.4%. The S&P rose 27 points for the week bringing annual gains to 7.9%. The Russell increased 18 points resulting in an 8.2% gain for the year.
The health of the economy appears to be robust after a handful of economic reports were released last week. Manufacturing activity for June reported by the Institute for Supply Management came in at 56.0, a slightly higher reading compared to the previous month with the prices paid index of this report showing a decline from May, indicating an easing in inflationary pressures. It was also reported that activity for the service sector increased to a reading of 60.7 in June. News of a strong labor market closed the week out as the unemployment rate remained low at 4.5% with June payrolls coming in at 132,000, higher than the 125,000 forecast by economists. Although the yield on the 10-year note fell below 5% at the start of the week, strong employment data helped reverse the pattern with the 10-year yield closing at 5.19% on Friday. It remains to be seen how much of an impact, if any, this closing yield will have on the start of trading this week.
What should investors look for this week? After the close on Monday, Alcoa (NYSE: AA) kicks off earnings season with the release of results. Wednesday evening, Genentech (NYSE: DNA) will report earnings along with YUM! Brands (NYSE: YUM). Before the opening on Friday, General Electric (NYSE: GE) will announce numbers.
The conference schedule is relatively light with C.E. Unterberg, Towbin hosting its three-day Emerging Growth Conference starting Tuesday in New York. CIBC World Markets begins its three-day 7th Annual Consumer Growth Conference in Boston on Tuesday. The Kaufman Brothers Defense Technology Conference will be held on Tuesday in Chicago.
On the economic front, May Consumer Credit will be reported on Monday afternoon. Tuesday at 10:00 a.m. May Wholesale Inventories will be released. Weekly Crude Inventories will be announced on Wednesday at 10:30 a.m. Prior to the opening on Thursday, Weekly Jobless Claims and May Trade Balance data will be reported, with June Treasury Budget being released later that afternoon. Friday morning before the bell, June Import/Export Prices will be announced along with June Retail Sales. May Business Inventories will be reported at 10:00 a.m. along with July Preliminary Michigan Sentiment. Additionally, Philadelphia Fed President Plosser will be speaking in London on Wednesday and San Francisco Fed President Yellen will be discussing the economy on Thursday.
One company that has said little for nearly three weeks has been healthcare services firm Hythiam, Inc. (NASDAQ: HYTM). The stock, which is up 21% since the end of April, retreated slightly last week, ahead of what should be an active second half of the year. The company cited a number of catalysts at its Annual Meeting last month, including increasing adoption of the PROMETA protocols by states, double-blind placebo controlled data, likely late this quarter and expansion of managed care relationships. HYTM also said at the meeting that there was a “distinct possibility” that revenue growth would begin to come from deals with countries. With shares underperforming the Russell 2000 so far this year (down 8.8%), it does not appear as if these types of developments are currently being valued by investors. Shares ended the week at $8.42, down 23 cents.
Volume in trading of Home Solutions of America (NASDAQ: HSOA), a provider of restoration, construction and interior services to commercial and residential customers, continued to decline last week, as investors on both the long and short side wait for details on the company’s two $100 million contracts in New York and Tampa, news on whether the company has resolved the note associated with the acquisition of Fireline and insight into the company’s second quarter, which ended June 30th. Trading appears similar to the April, early May activity, when the stock broke out of a low-volume base, surging 60% in less than a 30-day period. With short interest higher than during that period by approximately 2 million shares, the stock could be volatile ahead of earnings, expected in early August. The stock closed Friday near the bottom of the range that has marked trading over the past two weeks. Note, the stock’s 200-day moving average is $5.72. Shares ended the week at $5.83, down 15 cents.
Rentech, Inc. (AMEX: RTK), a developer of technologies that transform under-utilized energy resources into valuable and clean alternative fuels, last week announced it has hired plant engineering firm Chicago Bridge & Iron Co. to convert the Rentech Energy Midwest Corp. facility in Illinois from natural gas to a gasification-based fertilizer and ultra-clean synthetic fuels facility. CB&I will perform engineering and design services for Phase 1 of the conversion, which involves converting the feedstock at REMC from natural gas to coal. This conversion is expected to be complete in 2010 and result in the first U.S. plant to make clean synthetic fuels and fertilizer. Rentech expects the facility to produce at least 1,250 barrels per day or 17.8 million gallons of ultra clean Fischer-Tropsch fuels annually, as well as approximately 545,000 tons of ammonia and other nitrogen fertilizer products per year. The stock ended the week at $2.61, up 2 cents.
As reported last week, the Federal Reserve Board’s decision to eliminate the requirement to provide receipts for debit card transactions under $15 should prove to be a significant milestone for shareholders of USA Technologies, Inc. (NASDAQ: USAT), a developer of cashless vending and energy management products. The cost of installing and servicing printing equipment capable of providing receipts at vending machines, for mass transit, parking, road tolls and other POS terminals had long been considered a major impediment to offering cashless payment options in these locations, as well as kiosk, laundry and other small ticket self-serve markets. With debit card sales increasing from 9% of overall credit and debit card sales in 1997, to over 36% or $868.8 billion in 2006, Regulation E could serve to accelerate the adoption of USA Tech’s e-Port technology, as the elimination of the receipt requirement on small transactions should facilitate broader utilization of the company’s technology. Shares ended the week at $9.69, down $1.06.
Ceragenix Pharmaceuticals, Inc. (OTCBB: CGXP), a biopharmaceutical company focused on infectious disease and dermatology, last week announced that an investigational drug compound known as CSA-13 shows promise as a potential therapy to treat multidrug resistant Pseudomonas aeuroginosa infections which are a leading cause of morbidity and mortality in patients with cystic fibrosis. Patients with cystic fibrosis are at high risk for lung infections throughout their lifetimes and the repeated bouts of lung infections scar the lung tissue and ultimately rob the patients of their ability to breathe. The evaluation of CSA-13, led by Dr. Paul Janmey and Dr. Robert Bucki of the University of Pennsylvania, in collaboration with Dr. Paul B. Savage of Brigham Young University, found that the compound has the potential to be a significant advance in the treatment of patients with cystic fibrosis and other lung infections. In addition, the company said in a regulatory filing that it had received a six-week extension from investors in its $5 million debentures to reach a deal on a partnership with a pharmaceutical company for the sale of EpiCeram, its prescription topical cream, which received FDA approval recently. The extension gives the company more time to avoid a repricing of the debentures if it is able to reach a deal with a marketing partner. The stock ended the week at $1.82, up 5 cents.
IceWEB Inc. (OTCBB: IWEB), a software services provider, last week announced a $176,000 contract delivery order from a Federal Agency to provide Internet Traffic and Content Management Switches. Typically located in the data center in front of servers, firewalls and gateways, these products assist organizations in ensuring a high quality of service and manageability, allowing them to apply business policies to content delivery, support increasing traffic volumes, deliver their applications securely, enjoy operational efficiency and cost control, and remain flexible to future changes. IceWEB’ branded product family, which includes IceMAIL, a service that offers enhanced email, calendaring, data management, back-up and storage solutions; IcePORTAL, a service that offers Intranet portal applications, document management and application integration; and IceVISTA, a service that can be used with Linux or Windows Web systems and offers development/hosting services, DNS hosting multimedia production and managed servers, has been adopted by a list of impressive customers including the U.S. Department of Defense, Homeland Security, National Aeronautics and Space Administration (NASA), British Telecom, Lockheed Martin, Northrup Grumman, General Dynamics, and GS Technical (IBM). Shares remained unchanged for the week to close at $0.75.
OXIS International Inc. (OTCBB: OXIS), a biopharmaceutical company focused on commercializing predictive biomarkers, clinical assays and nutraceutical and therapeutic products, reported last week that Dr. Dirk Grundemann of the University of Cologne, Germany, found evidence supporting the use of L-Ergothioneine (ERGO) as a nutritional/dietary supplement to treat Chronic Inflammatory Diseases (CIDs), including rheumatoid arthritis, Crohn’s disease, diabetes, as well as heart disease and stroke. ERGO is a unique, naturally occurring anti-oxidant/anti-inflammatory agent that is abundant in most plants and animals, but cannot be synthesized by humans and therefore is available only from dietary sources. Oxis International’ patented synthetic process for the manufacture of pure ERGO has been approved in North America, Japan, and Western Europe. Investors should look forward to a boost in share price as a result of the company’ recently announced sales and marketing campaign for ERGO, as more scientists and physicians worldwide are uncovering and validating ERGO’ therapeutic nutritional value. The stock ended the week at $0.16, up 1 cent.
VoIP, Inc. (OTCBB: VOII), a provider of turnkey Voice over Internet Protocol communications solutions for service providers, resellers and consumers worldwide, said last week in a regulatory filing that it had completed the sale of all of the tangible operating assets utilized by its Dallas, Texas, division, including assets related to the EasyTalk and Rocket VoIP products for $400,000 plus a percentage of the division’ continuing revenue for the next three years. The business related to the assets sold generated revenue of approximately $1.4 million during the three months ended March 31, 2007 and posted a small loss. The company said the business was not in line with its present strategy. Shares ended the week at $0.05, down 2 cents.
Protocall Technologies Incorporated (OTCBB: PCLI), a provider of DVD on-demand systems for retailers and etailers, last week reported that its TitleMatch Entertainment Group division has signed a distribution agreement with Eros Entertainment Inc., who represent approximately 70% of “Bollywood” movies marketed worldwide. Indian movies do more business in the U.S. than films from any other country, with annual sales in the U.S. expected to reach $3 billion by 2012. A wide range of Eros new release and catalog movies will be available through the TitleMatch DVD On-demand service, allowing Protocall to immediately take advantage of this rapidly growing market. TitleMatch also recently announced a distribution agreement with The Right Stuf International, a leading online retailer of quality Japanese animation, or “Anime,” a film genre with worldwide sales totaling over $5 billion. Shares remained unchanged for the week to close at $0.04.
On the Wires: VeriChip Corporation (NASDAQ: CHIP), announced last week that its Chairman and CEO Scott R. Silverman has resigned as Chairman of the board of directors of Applied Digital Solutions Inc., to allow himself to concentrate his efforts solely on VeriChip, Applied Digital’s majority owned subsidiary. Such news sent the stock flirting with its 52-week high of $9.75. Auriga Laboratories, Inc. (OTCBB: ARGA) announced last week the appointment of Rick Coulon to the position of Vice President of Consumer Brands. Mr. Coulon brings over 20 years marketing experience in healthcare and consumer brands.
SPECIAL SITUATION:
Rio Vista Energy Partners L.P. (NASDAQ: RVEP) $14.47
Master limited partnerships (MLPs) offer many benefits to investors due to their tax advantages, high dividend yields and potential growth potential. This type of partnership usually targets the energy sector and is highly liquid where investors can purchase ownership interests of MLPs through a stock exchange. As a financing tool, the MLP structures enable companies to receive cash from investors for its assets while maintaining control at the general partner level. Profits and losses are passed on to MLP investors or unit holders through distribution payments. MLPs are not taxed at the corporate level on both a state and federal basis, resulting in a lower effective tax rate for businesses using this structure. This lower cost of capital creates a significant competitive advantage for businesses utilizing this structure. One such entity that recognizes the benefits of this type of partnership is Rio Vista Energy Partners L.P., as it looks to maximize its MLP structure while it moves away from the services sector and focuses future efforts on becoming an exploration and production company through a series of acquisitions.
Although Rio Vista still continues to own and operate oil and gas services assets in southeast Texas and Northeastern Mexico in connection with its LPG Transportation business, the MLP has reinvented itself to focused on acquiring oil and gas exploration and production assets, with the goal of generating near-term cash flow from which to make distributions to unit holders. The MLP is well on its way of executing this stated business goal after entering into a letter of intent to acquire substantially all of the assets of Northport Production Company just last week.
Northport is an independent oil and gas exploration firm with a production focus in the mid-continent region of the U.S. that owns and operates over 100 wells and has non-operating joint venture interests in an additional 150 producing properties. Northport estimates that it had unaudited revenue for the year ended December 31, 2006 of approximately $4.6 million and unaudited EBITDA of approximately $3 million. The purchase price was $18 million, half payable through the issuance of restricted units. The company will finance the balance of the acquisition via a seller note. RVEP also assumed $2 million in obligations. With less than 2 million common units outstanding as of RVEP’s most recent quarterly filing, the acquisition has the potential to generate significant earnings per unit. In addition to Northport, Rio Vista is also pursuing other transactions that would complement this acquisition and expand its asset base.
The market has apparently recognized the value-added that RVEP presents as its unit price reached a 52-week high of $15.75 on Friday before closing at $14.47. This trend should continue as Rio Vista represents an attractive opportunity as the MLP is poised to capitalize on its experience in the energy business to build a significant revenue base. The beneficial MLP structure enables the limited partnership to access capital at attractive rates while taking advantage of the lucrative opportunity presented by the energy sector that is still experiencing robust energy prices.