As employment numbers continue to be robust, and companies struggle to find effective workforce solutions, Medtox Scientific (MTOX) has been busy screening potential employees for various illegal substances. Tests for these drugs comprise roughly 2/3 of the company’s revenue and this business has been seeing stable growth over the last several years.

Not only does the company test potential and current employees, but it also has contracts with local governments such as the LA County Probate court to test inmates or individuals on parole. Testing in schools is picking up as many students participating in extracurricular activities such as sports teams are required to be tested. Finally, the company has agreements with many hospital emergency rooms to do on-site testing of patients so that doctors have quick access to lifesaving information on what toxins may be in the patient’s bloodstream.

In addition to drug screening, the company is also an active participant in clinical trials for drug companies. As these firms work through the trials required by the FDA, MTOX is able to provide economies of scale and collect and record much of the data necessary to prove a drugs effectiveness and safety. While this is a smaller portion of the company’s business, it is growing at a much more rapid rate than the illegal substance testing and has become an important part of the overall business mix. In the past year, the company has announced a partnership that will allow it to participate in international clinical trials which could be a significant revenue boost.

Financially, the company looks very healthy with a low debt burden that continues to be paid down. The balance sheet has ample cash to meet working capital needs, and the business is currently situated such that a small increase in revenue should drive earnings up significantly. This is due to the somewhat high overhead costs that are currently covered by moderate revenue. Should that revenue pick up, the overhead costs would remain relatively stable allowing much of the cash to flow directly to the bottom line. The company has beefed up its sales staff recently and evidence is pointing to their effectiveness in bringing in new business.

The industry is very competitive with Lab Corp and Quest Diagnostics taking the lions share of the business. However, MTOX has been able to effectively compete through offering unique services such as online reporting to employers of the entire testing process and results. The services offered include couriers to deliver specimens, on site testing, and detailed reporting. It is not impossible to think that the company could be bought by one of the bigger players, but at this point, I imagine MTOX is more likely to do an acquisition or two of its own to diversify itself geographically or to increase its product offering.

The stock has traded up this summer as investors have become aware of the value. This morning the stock is a bit lower on the earnings report which appear to be fairly healthy. The conference call is at 10:00 this morning. The pullback in the stock may be just the right opportunity to take an initial long position.

FD: Author does not have a position in MTOX

MTOX Notes