(NASDAQ:FHCO) The Female Health Company – A Well-Managed Company with an Unfortunate Name

The Female Health Company (NASDAQ:FHCO)” might be the worst ever name for a company. There’s no sex appeal here, despite being in the business of contraceptives. There IS value if you can get over the awful name.

This is an indexed chart comparing the past five years of performance FHCO versus the S&P 500. FHCO shares sell around $9 currently.

Indexed Stock Performance Comparison

Company Profile

The Female Health Company is obviously not a well-managed brand like Apple and Amazon. And that is one of the reasons it is a great buy. Most investors heard the name and disregarded it, completely ignoring the 60% gross margin. FHCO also comes with astounding 46% net margins, rock-solid balance sheets, zero debt, and exponential growth opportunities in the developing world. Management is heavily invested in the company, and therefore has expressed a healthy desire to continually increase shareholder returns. Unfortunately, FHCO is only fairly priced currently. If the market continues its downward momentum over the next month or two, great buying opportunities could present themselves. The other catch is that the company makes only one product. This is not a diversified conglomerate.

Female Health Company makes the FC2 female condom. Its fortunes basically ride or fall on this one product, and it has the odds stacked in its favor. The FC2 condom is the only FDA approved female contraceptive on the market to protect against AIDS/HIV and pregnancy. Now to American men, and perhaps some American women, female condoms have a negative or exotic perception, so how do the reviews stack up on Amazon? 4/5 Stars. The product is available in 143 countries.

The majority of purchase orders for the FC2 come from organizations such as the U.N. which then distribute them in places like Sub-Saharan Africa where AIDS/HIV has been running amok for the past several decades. The FC2 and other female condoms are being given away for free to women there, women who may have never possessed a contraceptive before are now being empowered in a fundamental, demographically altering way. More information about World Health Organization findings and programs can be found here: http://en.wikipedia.org/wiki/Female_condom .

The takeaways are mind-boggling. Female condoms are a cheap, effective way to empower women in developing countries, costing less than $1 each. They exhibit effectiveness when re-used (though this is not encouraged it has been proven to work). Female Health Company has committed to giving away a portion of its inventory to help with these efforts. Men and women in developing countries are going to become familiar with female condoms. The potential market share being captured in places such as South Africa is staggering.

Check out the size comparison between FHCO’s major competitors Dwight & Church (maker of Trojan condoms) and Actavis Inc. FHCO is around $270M. There is significant room to grow here.

Market Cap Comparison

Now let’s take a quick look at the margins. I could trim out the bad years to suit my thesis, but I chose to leave them in. This shows a clear progression for the company, transitioning from small-cap start-up to profitable enterprise. Note also that 2007 was the year the FC2 gained approval for purchase from the WHO.

Margins

Strong growth over the past 10 years and management continues to aggressively improve manufacturing cost margins.

Next we look to cash flow. If the FC2 can be improved, FHCO has the cash to invest. If not, expect dividend and share repurchase increases. The pile continues to grow.

Cash Flow

Conclusion

The stock has moved since I bought my initial position in April, but is still fairly priced for a great company in this industry. I suspect the name turns people off, which is fine for those of us looking at the numbers. Growth has slowed down this year after 2012’s explosive earnings increases, but there is still plenty of room to run and management believes that it will.

Valuations Comparison

How long until the party is over, the word gets out, and major institutions bid up the price and own 50-70% of the shares? That’s hard to say. Currently only 34% is owned by institutions. One lonely analyst follows the stock according to Factset (they recommend it as a Buy).

Insiders own approximately 25% of the stock worth about $66 Million dollars between 12 individuals. That’s a LOT of confidence that their company is going places. FHCO’s high margins compared to its competition are an expression of that commitment.

Currently FHCO represents around 4% of my portfolio. It should serve as a good counterweight to the stalwarts I own such as GE and Toyota. I intend to buy at or below $8.00/share. I believe that macro-market trends will push the price down to at least that low and perhaps lower in the short-term. Being a small-cap, the stock is inherently more sensitive to macro trends. This is a 5-10 year stock. I do not expect to get rich overnight holding it but I do believe that if I hold it over that time frame the stock will at least double in price and perhaps more. In the meantime, the dividend compares favorably with bond yields. If management continues to capture market share and keep margins low I might never sell. Long term, this company has immense potential.

Margins Comparison

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Author: secondhandstocks

The genesis for this blog stems from a Marine buddy and I came back from Afghanistan with more money than knowledge, and heedlessly tossed our hats into the stock market ring. A few months later, I remember discovering the classic book The Intelligent Investor by Graham and Dodd, and ravenously devouring my first introduction to value investing. That framework - with some generous additions by Seth Klarman, and Joel Greenblatt among others - guides my investment philosophy. I spent five years working in the intelligence field, both in the Marine Corps and then for a government agency after that. I speak Arabic and Pashto, have programming and analysis experience, and enjoy investing in technology companies as a hobby. I also spent a year on Wall Street working on a #1 Ranked Institutional Investor team, before deciding that that the Sell-Side was not for me.

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