Monday, January 20, 2014

Keep it Simple Stupid Investment: Female Health Co FHCO

Disclosure: I own shares of FHCO in my IRA

Skimming through a 74 page 10-Q might be some folks idea of a good time, but it's also going to consume a bunch of it too. A keep-it-simple-stupid investment should be one that you can explain to someone in 5 minuets or less.

Female Health Company is a stock I've been following (and investing in) since 2008. It's one of the simplest companies I have ever come across ... especially in the consumer goods type business.

Here are some quick stats about the company:

Full Time Employees: 132
Cash: $8.92M
Debt: $0
TTM Profit Margin: 45%
Source: Yahoo! Finance

The Female Health Company has 1 product. An FDA approved female condom. They call it the FC2. The company began with a condom called the FC1 - then improved on the technology several years ago ... which did 2 important things for shareholders. #1 the FC2 was cheaper than the original FC1 condom - and #2 (and more importantly) it was sold at a higher margin than the original FC1. Basically the Female Health Company hit the grand slam of consumer goods - they lowered the cost to the end consumer - and they increased their margins at the same time.

The majority of the sales come from large organizations, like the United States Agency for International Development (USAID), who order very large quantities usually to distribute to areas of the world with high AIDS/HIV and sexually transmitted infection rates.

You might ask: who uses a female condom? If you live in the United States, not many people. The last time I went through the company reports, they have some distribution in the New York and some other areas, but retail sales in the US are not a big money maker. In other areas of the world female condoms are relatively popular, and give women the power to prevent disease & pregnancy; instead of relying on the man to always wear a condom. Additionally - the FC2 can be re-used, which is an attractive value proposition in less wealthy nations.

With simple comes risks!

Okay, so that all sounds good. Simple company, simple product, patents, FDA clearance, share buy-backs, and a handy dividend yield sounds all good to me.

But - with only 1 product - and only a handful of bulk buyers, you are exposing yourself to plenty of risk. While I think its more likely a competitor would offer to buy-out Female Health Company if they wanted in on the market (quickly) - there are other, very small, competitors that could eat into market share if they were to get orders for their product. Also ... you're betting these large health organizations will keep getting funding AND keep buying these condoms. Any drop in orders, or worse, a cancellation would leave this company scrambling because there are only a few organizations with the buying power that can move the needle on sales of one product.

Ok, so that's basically the bad news.

In my opinion, your reward - now mostly in the form of a quarterly dividend & share buy-backs - is greater than the risk of a large buyer pulling out (bad pun) .... or a competitor coming up with a better version that clears the FDA & other approvals. Another risk is potential vaccines, cures or other medical advancements that reduce the need for condoms in general ... but without knowing much better I'd imagine we are decades away from that.

In short, Female Health Company is a simple, 1 product company - with only a handful of large buyers. Traditional male condoms will essentially always loom overhead as it's largest competitor and the industry standard. However, if large organizations are distributing male condoms - wouldn't it seem a little discriminatory if they didn't distribute female condoms as well? So in some ways, you could possibly assume the FC2 can piggyback off the sales of male condoms. If you believe that logic, you reduce your risk to just hoping health organizations receive funding & no other competitor entering the market.

The decision to invest is up to you, but at least it doesn't take reading a small novel of text to understand the Female Health Company. That alone makes it an attractive candidate to consider.

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