Women First HealthCare (Nasdaq:WFHC) has been one of the world's best-performing stocks in the past year. Since January 1, the stock is up 320% from $2.81 to a recent $9.00. But wait, it gets even better -- the stock is up a cool 2,055%, or more than 20 times, since hitting a 52-week low price of $0.438 in October of last year. According to our One-Click Scorecard at Quicken.com, Women First has a relative strength of 100 -- the highest score possible.
I first came across the company in Barron's recent semi-annual roundtable investment issue. Twice a year, Barron's solicits market insights and stock picks from some influential money folks such as Abby Joseph Cohen, Mario Gabelli, and John Neff. In the most recent roundtable, Women First was the only pick of Oscar Schafer. I hadn't heard of Schafer before I started reading the Barron's roundtables, but the man sure can pick stocks. In the January 22 issue, Schafer chose five stocks -- and two of them were in the top 100 stocks in terms of 26-week returns for the period ended June 29. That's some phenomenal stock-picking.
In the most recent roundtable, Schafer noted that Women First, then trading at $5.63, could earn more than $1.00 a share in the next few years, at which point it "could sell closer to 20 than 10." I immediately put the company on my list of stocks to research -- a list that's now up to about 100 companies, most of which end up getting ignored. That would likely have been the case with Women First had it not been for the fact that I coincidentally received an email last week from Women First's Diane Donohue, who upon my request sent me an investor kit. What I discovered was one of the most impressive turnaround stories I've seen in awhile.
Women First HealthCare was formed in 1996 based on the idea that there is a large, underserved market for women's healthcare needs, specifically for women over the age of 40. The company invested more than a year researching the market, and got some early backing from Johnson & Johnson (NYSE: JNJ). Women First started developing a product line and a marketing program in 1998, and went public in 1999.
Initially, the plan was to identify promising or underperforming pharmaceutical products for post-menopausal women that Women First would co-market on behalf of the drug maker. The company quickly made agreements with Ortho McNeil (a J&J company) to distribute its Ortho-Est estrogen tablets, and with French pharma Laboratoires Fournier to market the Esclim estrogen patch. In addition, Women First created a website, womenfirst.com, and acquired a mail-order catalog, called "As We Change," through which it markets health and self-care products to its target market -- women over 40.
It all sounded great on paper, but the company soon ran into problems. In the first six months of 2000, Women First generated $13.3 million in revenues, but operating expenses were $32.7 million. The company discovered that its co-promotion agreements had locked it into heavy marketing expenses without a commensurate revenue opportunity. By June 2000, the company was down to $18 million in cash, having burned through $15 million in just the first six months of that year. The stock, which had started the year around $6.00, had dropped to under a buck a share. Had I looked at the company at that time, I would have predicted that the company would be out of business within a year.
But that's not what happened. In late June 2000, company founder Edward Calesa resumed the role of president and CEO and brought in a new management team. The new managers took a hard look at the business model and decided to change it; instead of co-promoting, they would acquire the products outright. The company started by acquiring Ortho-Est from J&J, and reworked its deal with Fournier. Calesa also clamped down on the cost side, significantly reducing operating expenses while focusing resources more intently on Esclim and Ortho-Est.
The business improved steadily. By the fourth quarter of 2000, the cash burn had been cut to under $2 million. In November, with the stock still around a buck, insiders began buying shares on the open market. By February, the stock was back up above $3.00.
The turnaround was just getting started. By the end of the first quarter of 2001, the company had reduced the cash drain to less than $1 million. Pharmaceutical sales improved dramatically, to $5 million in the quarter, compared to $5.7 million for the entire year before. Total revenues dropped slightly, but costs dropped even faster, and the company announced that the drug operations had reached breakeven.
With $9 million in cash and expectations of further improvement, survival is no longer an issue. In May, Gruntal & Co started coverage for Women First with a 6-18 month target price of $15. The stock was then at $5.70. The Barron's mention, which coincided with a positive press release from the company, caused a 33% jump in the stock price. At a recent $9 per share, WFHC now carries a market cap of over $157 million. It's clearly not a flea-market bargain anymore, but it could still be a decent investment.
Let's see what it would take to for Women First to reach our 2X/3Y target. This is a company with only $26.7 million in sales in the last 12 months and a loss of $15.6 million. So, at the current price, you are paying just under six times sales. There is no P/E ratio, since we have no E. Of course, the past doesn't really help us much here -- this is a company one has to value looking forward. My guess is that Women First can sustain its momentum and will end the year as a profitable company. I also like Women First's chances to generate some incremental growth by acquiring additional products (including one it announced just yesterday).
Now, $157 million would seem like a lot to pay for a company that lost $15.6 million over the past year and likely won't be profitable for another quarter or two. But personally, I like to find companies that have a lot of business momentum and are just turning the corner, because they tend to offer the most dramatic earnings growth.
Nevertheless, small-cap investors should also look for a margin of safety in their investments -- and that is especially true of development-stage companies. To reach Schafer's $1.00 per share earnings target, the company will likely need about $18 million in net income, assuming the market assigns an earnings multiple of 20. Women First is probably three years from reaching that number -- a double from current market levels. There isn't a lot of room for error, but I like the company's chances to get there.
Of course, the above scenario requires continued momentum and execution, and there are no guarantees. Investors who like the story but who demand a higher margin of safety may want to keep Women First on the radar and watch for additional progress or wait for a better price. The market can be fickle in pricing stocks; small companies can often be surprisingly volatile, providing the patient investor with an occasional fat pitch to hit.
Zeke Ashton does not have a position in Women First, and doesn't use the company's products. The Motley Fool has a complete disclosure policy.
