Description

PMD was written up on VIC in 2021 by 4maps and has good background on the company and industry. PMD is a top hair drug testing company with a long tenured high-quality reputation and industry leading science. The hair drug testing market should grow faster than GDP given the test’s superiority in detecting true drug users. We believe there are less than a handful of real players in the hair drug testing space making it an oligopoly. We believe this is a capital light business with normalized EBITDA margins in the mid to high teens.

Headwinds that have led to recent underperformance should normalize. The tight labor market (JOLTs data) and the difficulty of finding employees to hire in many of PMD’s sectors has hindered the business. Given how hard it is for many companies to find workers, it has made it less likely that companies will switch more or all of their drug testing policies to hair from urine. Hair catches multiples more drug users than urine (or saliva) given its long detection window and inability to be cheated – and thus making the candidate pool of true drug free workers smaller. We believe over time more companies in several sectors will gravitate towards hair testing because this is the best way to have a drug free workplace, reducing significant potential liability and employee turnover.

We believe prior management was the headwind that has significantly held PMD back from capturing a much higher intrinsic value.

We have high conviction that PMD has recently transferred from a severely underperforming CEO/mgnt team to one that is highly likely to be very effective in creating value. As we know in the micro/nano cap world – going from bad to good (or great) management or vice versa can have an enormous impact on the fortunes of shareholders.

There are several reasons why we have conviction that the fortunes of shareholders are going to change from the change in leadership at PMD. We have conducted numerous conversations with former management, former and current employees including the new CEO, competitors, customers, and several other industry participants.

• Former CEO Ray K. was extremely conservative, dogmatic and didn’t allow any “outside of the box” thinking toward creating value and instead just focused on maintaining the dividend which the company paid for 94 straight quarters. Several industry participants including large former and potential customers described a sour taste Ray K left in his dogmatic leadership style. 
• New CEO Brian Hullinger has extensive experience in growing businesses and preparing them to sell, he has created value at his last few roles including most recently as CRO at Cisive in the screening industry. We found Brian to be very bright and highly focused on creating significant value at PMD which he described as a company that had very high potential and high-quality IP.
• We believe Brian was likely vetted and picked by Peter Kamin and his fellow board member Nevin, it is hard to find an investor/activist in the microcap world with a better track record of creating significant value than Kamin. We are very comforted with Kamin and Brian implementing a strategy and executing on significant value creation.
• We believe that Brian is making significant strides with the team (including several fresh leaders), strategy, and quickly improving PMD’s reputation with industry participants including employees, customers, potential customers, and TPAs.
• Outside of the box thinking to capture growth. Opportunities such as partnerships and going after new verticals.
• We also believe Ray K is likely the reason regulators still haven’t made hair and approved DOT test.
• Once the company is on track it is clear to us that the co will be sold– Kamin letter, Brian history, and by what a good fit this would be for CRL, Labcorp, or another drug testing platform player.

Hair testing will most likely be certified by HHS as an approved standalone test, HHS will publish its review in the coming months. Congress mandated that hair testing be an approved DOT drug test but due to bureaucracy it has taken many years for HHS to publish guidelines that validate hair as an approved standalone drug test. This should lead to increased adoption; it also will pave the way for DOT to potentially make hair testing a requirement in the trucking industry (not a given, but would be a huge boost to business).

PMD earnings power

We believe PMD will return to an earnings power near its 2013 levels of $6.5M in EBITDA, which were pre-Brazil. For most of the last few decades PMD been a fairly steady business with high margins, PMD paid a dividend 94 quarters in a row. While PMD may not achieve EBITDA margins over 20% anytime soon, we believe the normalized earnings power in a couple years is mid $30Ms in revenue with 15% EBITDA margins or ~5.5M in EBITDA. And if hair testing gets some regulatory tailwinds, we believe revenues can shake out $5-15M higher than our base case, and at very high contribution margins this would add a few million to EBITDA. So the upside case would be $9-12M in EBITDA. We believe it is essentially a foregone conclusion that PMD will be sold inside of 2-3 years. We believe the co will be taken out at around 8-9x EBITDA. On our base case normalized earnings power of $5.5M in EBITDA this would translate to a $8.20 stock (or a 3x). In our bull case of $9.5M in EBITDA at an 8.5x multiple would be north of $14 per share (5x).

While PMD is not the easiest to model at this stage, we take comfort given our view that these assets are worth much more than $16M and we have a quality team shepherding now, PMD does have a long history of solid earnings, and the business would be a good fit for a number of strategics.

Labcorp, CRL, and Quest all have EBITDA margins north of 20% and trade at mid-teens EV/EBITDA multiples.

PMD has a net cash balance sheet, key executives are heavily aligned with RSUs.

Some investors are cautious on PMD given their perception that Kamin may want to delist the co. Our pushback would be – 1) essentially every company Kamin has delisted has been a huge multibagger (including Rand Worldwide, Calloway’s Nursery, Rockford, even TTSH) 2) Kamin got sued last time he delisted which was TTSH (which eventually re-listed) and had to deal with a very irritating lawsuit, I highly doubt Kamin would want to risk this hassle again (just look at what is public co stakes are worth – he is a made man) when the co is going to be sold in 2-3 years anyway 3) if they do delist then the cost savings would be material and the end result would not change, the co is just as likely or more to be sold in 2-3 years and we would get the same price.

We believe PMD is an extreme mispricing, tax selling and dividend investors punting likely are a big reason for stock being sub three, but looking underneath the surface there is plenty of value that should be created from here.

Catalyst

new management growing the business, absense of tax loss and dividend investors selling