Breathe Right strips or no, investors in the product's maker, CNS (NASDAQ:CNXS), are breathing heavily today as they hope for a repeat of last quarter's gangbusters earnings report. Will tomorrow afternoon's fiscal Q1 2007 news leave them congested, or breathing easier?

What analysts say:

  • Buy, sell, or waffle? Five analysts follow CNS, and all of them call it a buy.
  • Revenues. They expect to see 11% sales growth to $26.2 million tomorrow.
  • Earnings. But profits down 11% at $0.24 per share.

What management says:
CEO Marti Morfitt pronounced herself "very pleased to report 20% consolidated revenue growth and a 26% increase in net income for fiscal 2006" last quarter. Also pleasing for a U.S. corporation that dominates the domestic market for its signature product was the fact that the places where it can still grow strongly, did so. Sales of Breathe Right here at home achieved a respectable 9% growth rate, while away from our shores, international sales grew 32%; meanwhile, sales of the relatively new product offering, FiberChoice, grew a whopping 70%.

Looking forward, the company aims to continue introducing new products such as Breathe Right Snore Relief rinse; expanding existing product lines, as when it added a "plus calcium" variety to its FiberChoice offerings; and working to continue expanding overseas. All this in hopes of growing total sales at a double-digit clip, and moving $125 million to $131 million worth of product in fiscal 2007.

What management does:
After a bit of a slip-up in last year's Q3, CNS turned things around last quarter and got its rolling gross and operating margins moving back upwards, also stabilizing its net margin. All of which are essential steps if the company is to benefit from its growing sales by keeping profits rising as well.

Margins %

12/04

3/05

6/05

9/05

12/05

3/06

Gross

71.8

71.5

71.9

71.7

70.2

70.5

Op.

16.2

21.4

23.4

23.5

22.6

22.7

Net

11.3

14.6

16.0

16.0

15.3

15.3

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
In our regular bi-annual roundup of all Hidden Gems picks to-date, co-analyst Bill Mann had this to say about CNS: "Its FiberChoice line seems to be gaining traction. [but] the company lives and dies with the results in its Breathe Right strips."

If that's true, then investors should sleep easy with CNS. Not only are the new products doing well, but CNS utterly dominates the market for these nostril-flaring mini-band-aids. Moreover, the price is actually down from last quarter, when the company reported its last batch of superior results. Now, the firm still isn't super-cheap: with an enterprise value-to-free cash flow ratio of 17.4, and long-term growth projected to run at 16.5% per annum, the firm only looks fairly priced to this Fool. But a fair price for a company with a lock on its target market and some decent prospects for expansion -- that looks more than fair to me.

Competitors:

CNS has few, if any, direct competitors in its niche. The most likely threats to its business probably come from companies offering alternative varieties for treating congestion:

  • GlaxoSmithKline (NYSE:GSK)
  • Novartis (NYSE:NVS)
  • Procter & Gamble (NYSE:PG)
  • Wyeth (NYSE:WYE)

Customers include big drug stores like CVS (NYSE:CVS) and Walgreen (NYSE:WAG).

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GlaxoSmithKilne is an Income Investor recommendation.

Fool contributor Rich Smith does not own shares of any company named above.