Posted May 2nd 2007 2:00PM
Yared
This begins the actual stock selections of the (hopefully) top 5 stocks for the next 25 years. These companies will play in nascent markets with a huge addressable audience and with great management and vision. They will become the leaders and game changers for the next generation of stocks.
The 25 companies are in no particular order, just random order. Keep in mind that because I am attempting to identify home runs for the more distant future, these names will be smaller capitalization names in general, or the math will not work out for investors.
The top 25 for the NEXT 25 years begins with Electro-Optical Sciences (NASDAQ: MELA).
MELA is $60 million market capitalization (total shares times by the current price) company. MELA trades at $4.50 per share and the average daily volume is about 35,000 shares per day -- not what you would call the most liquid name. But the potential and the market it will serve is massive and worldwide.
MELA is in phase III clinical trials on a device that will assist general practitioner physicians and dermatologists in the detection of melanoma, skin cancer. Typically when a physician suspects that a skin lesion or an abnormality is present, the first course of action is a biopsy. The biopsy is a bit painful and certainly expensive. There are over three million biopsies performed in the
MELA's device is a small machine easily used by the physician. It is linked to a central server system via the internet whereby the physician can determine, with extraordinary help and resources, if the mole or lesion should then be biopsied for more analysis. The good news is the vast majority of skin moles and lesions are benign and further treatment is not necessary. The bad news is that melanoma is the deadliest form of skin cancer, but is virtually 100% curable if caught early. Many patients are mis-diagnosed or not diagnosed until too late. With MELA's technology and systems, the occurrence of mis-diagnosis could drop off dramatically.
To date, MELA has conducted tests on over 5,000 skin lesions at 20 different clinical sites. Its efficacy has been superior to any other methodology. MELA anticipates the completion of Phase III clinical trials by the end of the first quarter of 2008. With Food and Drug Administration approval expected before mid-year 2008, when the roll-out process would begin in earnest. Sales and marketing personnel are slowly being added to the company's staff. Training sales reps takes a good six months to accomplish.
MELA could begin to realize significant revenues before 2008 year-end, with a powerful ramp in revenues to $30 million in 2009 and $50 million in 2010. Being a medical device, the eventual operating margins could approach the 30% level. As MELA rolls out to the marketplace over the next couple of decades, this company could grow to a billion dollar revenue base with explosive earnings.
MELA has signed an agreement with L'Oreal, the giant cosmetics manufacturer, as L'Oreal wants to better understand skin types and the appropriate cosmetics to meet this need. No dollar amount has been placed on the partnership with L'Oreal.
Electro-Optical Sciences is headquartered in suburban
MELA has life saving implications addressing a massive market with minimal to no competition. It could be a top stock for the NEXT 25 years.
ZOLTEK (ZOLT)
Zoltek is headquartered in suburban St. Louis, Missouri and has a current market capitalization of $1.1 billion. The stock is trading at $39. For full disclosure, I have been recommending Zoltek to the members of my web site since $19-20 just a few months ago. The stock is still a buy.
Zoltek develops, manufactures and distributes carbon fiber which has hundreds of applications. Zoltek is considered an alternative energy company as carbon fiber weighs less than traditional materials and therefore employs far less energy. Some of the applications are in primary building materials: Sporting goods, aircraft braking systems, and the blades on energy creating wind turbines. Zoltek has received a lot of attention in the wind turbines sector as the demand is very high for these windmill-looking energy generators. The carbon fiber making up the blades requires little to no maintenance and is lighter allowing for faster revolutions. Thus, more energy is generated by using Zoltek's carbon fiber.
Currently, Zoltek's carbon fiber is found in small production, high performance automobiles. Zoltek is developing applications with the auto industry for larger production, lower cost models. The auto and airline industry will provide huge growth opportunities for Zoltek, especially as vehicle or plane weight is relevant to energy savings.
Zoltek's entire production capacity for 2007 and 2008 is already booked. The company's visibility to revenues and earnings is at 100%. Zoltek is working on expanding its current production capacity as the company sees an ever growing demand for its products world-wide.
Zoltek.s numbers are quite impressive with huge growth. The company has a September 30 fiscal year end. For September 30, 2007 I estimate Zoltek's revenues at $158 million and earnings per share of $.79. For September 30, 2008 I estimate revenues of $250 million and earnings per share of $ 1.52. The company has a stated revenue goal for fiscal year 2009 of $500 million. It may prove to be a little aggressive, but the growth rate for ZOLT is dramatic.
The industrial world is gradually moving to a model of tougher materials at a lighter weight. Zoltek's carbon fiber product fits the bill superbly. What makes Zoltek's addressable market so large is the heat resistance of carbon fiber: It does not weaken or break down under high heat conditions.
Zoltek has had a good run so far but the applications and manufacturing capacity are ever expanding. Zoltek has a tremendous opportunity to be a Top 25 Stock for the NEXT 25 Years...
Crocs (that's right...Crocs)
Crocs manufactures its unique footwear from specialty resins that allows for the foot to breath and experience self-molded comfort. Yet, the shoes sell for $29.99 to $59.99 at the retail level. The shoes are unique in design and are offered in bold, dramatic colors. Crocs shoes appeal to toddlers to the elderly, across all demographic lines and in almost all geographies. What makes Crocs so dynamic is its distribution model. Although the company only operates about 100 self-serve kiosks, the other avenues of distribution are over 24,000: 11,500 in the United States and 13,500 in the rest of the world. The company also operates a dynamic web site allowing direct customer purchases at, of course, higher margins.
Crocs has successfully entered the fashion-forward university market with over 100 license agreements signed. It has inked agreements with the NFL and the NHL as well. Because the specialty resins are applicable for other products, Crocs is marketing unique products for kayaks and canoes to scuba diving fins.
Crocs offers a line of t-shirts, sweatshirts and other cool apparel as well as Jibbitzs, which appeals to children. Jibbitz are little attachments that kids love to "fill in the holes" of their Crocs shoes. They come in various cartoon and television characters. Crocs also sells wristbands, school backpacks, coffee mugs and many other interesting and unique products.
The story of Crocs lies within its margins. The company has already achieved operating margins in the mid 20's% with room to expand them even more. It is a highly profitable company which is unique for such an early-stage high growth concept. Crocs is determined to keep its product line fresh, hip and cutting-edge. The company has no intention of being viewed as a fad as fads can disappear as quickly as they appear. Crocs wants to model itself after NIKE (NYSE: NKE), which has stood the test of time and remained relevant for over 30 years.
Crocs has a long way to go before it is considered the "next Nike," but the company is well on its way. Revenues for 2007 I estimate at $615 million with earnings per share at about $2.90-2.95. For 2008 I estimate revenues at $800 million and earnings per share at $3.70. For a footwear/apparel vendor to have such high ,and more importantly, sustainable operating margins in the 20's%+, the valuation of Crocs will always command a generous and deserved higher PE ratio. The stock is trading at a 20 PE to 2008 estimates and is still not fully valued. With its accelerated growth rate Crocs' stock price could be justified with a 25-30 times forward PE ratio.
Crocs is on the list of 25 best stocks for the NEXT 25 years because of its global strength and excellent management team. By the way, if you have not tried a pair...try em!! I just got two pair from my kids for my birthday (age not relevant!) and I love them...
The next name in my continuing series of Top 5 stocks for the NEXT 25 years is Chipotle Mexican Grill (NYSE: CMG). The opportunity to expand and grow for Chipotle is so large that this company could become the next McDonald's (NYSE: MCD). In fact, one of the first and biggest investors in Chipotle was McDonald's. McDonald's invested in Chipotle in late 1999, enabling the young concept to have the necessary capital to expand its geographic reach beyond its headquarter base of Denver, Colorado.
I have been recommending Chipotle to members of my web site since last September when the stock was trading at $49. The shares are now at $82, representing a market capitalization of $2.6 billion. The company has a store unit base of 600 locations, but the exciting part of the story is that Chipotle is just starting. This company has an extremely loyal following of customers who visit Chipotle on average three times per month. The food is authentic Mexican and it is as fresh as fresh can be. The menu is simple in nature -- burritos, tacos and salads. The pork and chicken served is organically raised and the vegetables and bean are almost totally organic. Simply put: the food is excellent and healthy and the surroundings pleasant and inviting.
As I mentioned, I have been on this stock since $49; why is it still one to accumulate at the $82 level? Chipotle is tapping into the American appetite for freshly prepared Mexican food. With only 600 units in its base, Chipotle has the room to grow the concept by a factor of 15-20 times. The U.S. market alone will easily absorb 10,000-12,000 units before any discussion of saturation creeps in. Chipotle is appealing to all demographic and ethnic tastes. The Mexican population in the United States frequents Chipotle's as the food is similar to home cooking.
McDonald's has a market capitalization of $62 billion or about 30 times the size of Chipotle.This is the model for Chipotle to emulate. Chipotle has a loyal following of customers excited about bringing in new customers, as the dining experience is worthwhile.Chipotle went public in February 2006 and has exceeded expectations every quarter. My estimates for 2007/2008 for revenues and earnings per share are $1.06 billion and $1.72 and $1.32 billion and $2.20 respectively. Currently the operating margins are in the 7-8% range with huge room to grow. Chipotle is investing in new store openings and advertising, although so much of the business comes from word of mouth. As the concept matures over time the operating margins will be in the 16-19% range.
McDonald's has divested itself from its share holdings in Chipotle. Investors were relieved when McDonald's sold its last remaining shares in late 2006, thus allowing for individual and institutional shareholders to no longer be concerned about McDonald's intentions. McDonald's was purely an investor with no other involvement. Chipotle management did learn quite a bit from McDonald's in terms of supply chain and inventory management.
With the concept gaining national prominence and acceptance, Chipotle can indeed become the next major fast-casual food retailer in the United States and reward its shareholders along the way quite handsomely. The stock has had a huge run up since the IPO and investors may want to nibble away at beginning a position. But keep in mind this company has the chance to be a 30-40 bagger over the next couple of decades.
The NEXT company in my ongoing series of the top 5 stocks for the NEXT 25 years is SurModics, Inc. (NASDAQ: SRDX). This Eden Prairie, Minnesota-based company has a current market capitalization of $650 million with a revenue run rate of $75 million. The company is actively involved in many next-generation medical technologies.
SurModics' mission is to provide leading-edge surface modifications and advanced drug delivery technologies and products. The company is divided into three distinct divisions: drug delivery, hydrophillic and In-Vitro. The drug delivery segment offers various technologies to site-specific delivery of drugs. Within this segment is the burgeoning ophthalmology division, which helps deal with serious eye diseases such as age-related macular degeneration. The hydrophillic segment has proprietary technologies for medical devices. It's a lubricious coating that allows for better placement and maneuverability of the actual devices. The In-Vitro division includes products for genomic slide technologies and stabilization products for immunoassay diagnostic testing.
SurModics sells its products to a whole host of medical device and life sciences companies. The hydrophillic business segment will normally have a very long term commitment with its medical device customer, as SurModic will specifically formulate the lubricant to compliment the device company's requirements to satisfy the US Food and Drug Administration (FDA). The same with the two other divisions as SurModics is usually involved early on in the development and FDA approval process.
The ophthalmology division has the potential for exponential growth as serious eye disease is an increasingly common medical affliction in an aging population. As the incidence of diabetes increases in an aging baby boomer set, SurModics is involved in the research and development of treating diabetic macular edema. As the treatment enters Phase III clinical work, SurModics has arranged for a long-term royalty structure.
I estimate SurModics to generate revenues this year ending September 30, 2007 of $75 million with earnings per share of $1.40. For the fiscal year ending September 30, 2008, I believe SurModics will generate revenues of $85 million with earnings per share of $1.63. The hyper-growth stage could begin in mid to late 2008 as the opthalmological products gain a strong foothold in the medical market place. Normally, once a company has attained FDA approval, other nations tend to follow quite quickly. With macular-degeneration unfortunately being a "growth illness" unto itself, the opportunity for SurModics is enormous.
The other divisions of SurModics will also provide solid and consistent growth. With all of the development and cutting edge work that SurModics is involved with, this company has a strong opportunity to be a top 25 stock for the NEXT 25 years.
DEXCOM (DXCM)
DexCom, Inc (NASDAQ: DXCM). This San Diego, California-based company has the opportunity to address the millions of people that suffer from diabetes. DexCom manufactures a continuous glucose monitoring system, which is extremely user-friendly and helps improve the diabetics' quality of life.
DexCom's business model is the classic razor-razor blade. DexCom sells a wireless glucose monitoring device, for about $800 per unit. Because of the wireless component, the monitor is completely mobile with the patient and can even be hooked to a belt like a cell phone. The company also sells the "implantable" disposable sensors that the patients slip-in just under the skin. Each sensor is good for up to 72 hours. The sensors come in a five-pack and sell for about $175 a pack.
Patients no longer have to endure the painful finger prick to draw a minor amount of blood to detect their glucose level. Also, with the monitor and sensors, the readings are far more accurate and continuous so the patient can administer the necessary insulin at the precise time versus a bit of a guessing game.
The company has a market capitalization of $185 million and is not yet profitable. I expect sales to reach about $9-10 million this calendar year and a loss of about $1.30 per share. For calendar 2008 I estimate DexCom's revenues to reach $27 million and a shrinking loss per share of $0.80. The biggest issue facing DexCom is insurance reimbursement. Medicare, Medicaid and private insurers do not yet reimburse patients for the expenses incurred.
The company is lobbying the medical insurance systems for reimbursement. The Juvenile Diabetes Association has endorsed DexCom's products wholeheartedly and will lend its influence with the various federal jurisdictions.
As with most new medical device companies, the mega expense is the sales and marketing costs. The market needs to be seeded and the best way to accomplish this is with "feet on the street." The earnings leverage will come with revenue growth driving down the sales and marketing expenses as a percentage of sales. The second driver to accelerated earnings and revenue growth will come when reimbursement is no longer an issue.
DexCom is servicing a multi-billion dollar market, worldwide in scope with the most advanced product available. The razor-razor blade model will generate huge future operating margin. The best part of the DexCom story is the enhanced quality of life for the diabetic patient.
