of the San Francisco 49ers says he wears the
nasal strip because it gives him legs in the fourth quarter. It must be something, because that nasty white tape across the nose sure looks ugly.
Even as the number of be-nosed Breathe Right athletes proliferate,
(CNXS:Nasdaq), which makes the strips, finds its own go-go growth legs struggling to keep pace.
For the fourth quarter, reported after the market closed today, CNS missed analysts' EPS expectations, as tracked by
, by 2 cents. Net income grew 9% to $5.5 million, or 27 cents a share, compared to $2.9 million, or 16 cents last year.
The company shrugs off the earnings disappointment, claiming the year-to-year comparisons are unfair because no taxes were paid in 1995. Daniel Cohen, CNS' chairman and chief executive, points to the tremendous sales growth, up 104% to $24.5 million, compared to $12.1 million last year, as a sign the company is still playing hard.
But some company followers are skeptical of the sales figures.
"Our revenue and earnings-per-share estimates for 1997 and 1998 suggest growth is decelerating," says Parice Halbert, an analyst with
in Minneapolis, who downgraded the company to a hold on Dec. 20 based on anticipation of softening sales. She says the doubled fourth quarter revenue is misleading.
She looks at domestic sales, which were up 58% for the quarter to $17.9 million, compared to $11.3 million last year. Halbert argues domestic sales need to double for the company's growth to continue.
Halbert also forecasts international sales will flatten next year, as foreign retailers sell off excess inventory. "There has been so much stuffing of the pipeline internationally that some of it has to work through before
CNS can sell more," she says. International sales totaled $6.6 million in the fourth quarter, compared to $760,000 last year.
While Halbert, whose firm hasn't done any underwriting for CNS, has left the stadium, Michael Sabban, an analyst with
, the Minneapolis firm that underwrote CNS' most recent offering last March along with
, remains a devoted fan. Same with Montgomery, which has maintained a buy rating on CNS since last spring.
Cohen defends the company's prospects. "It's ludicrous to say our sales have peaked." He insists the product, which is marketed to relieve snoring and nasal congestion in addition to helping improve athletic performance, has only penetrated 9% of the domestic market. He ultimately sees the product reaching at least 50% of the 37 million Americans who snore and notes that in the past six months the company has tapped "several million" new users.
Investors, who've seen their money grow five fold since CNS went public in 1987 at 3 3/4 a share (adjusted for a 2-for-1 split), depend on huge revenue gains to maintain momentum. But with the stock sagging 64% since June, to 14 3/4, where it closed Monday, some say CNS has had its run.
Sales aside, a pending patent lawsuit and delayed new product offerings have some investors betting against the company.
"It's a one-product company that's overvalued," says a hedge fund manager who is shorting CNS. He spoke on condition of anonymity.
Short sellers have circled mightily around CNS in recent months, and the group now holds 11% of the 19.15 million outstanding shares. That's a 9% increase over last month.
Feeding the short sellers is a lawsuit over the Breathe Right domestic patent, which allows the company to avoid competition in the United States. That patent is now being contested in court by Inglewood, Calif.-based
Acutek Adhesive Specialties
, which claims it owns the patent to market a nasal dilator similar to Breathe Right.
"Our patent pre-dates any other nasal dilator patent," says Gerry Muchin, president of the closely held Acutek, which makes burn and wound dressings.
"It's inconceivable that we could lose the case," Cohen counters. CNS has already fended off a competitor who tried to muscle in on its patent. The product was called Breathe Better and was marketed by a New York businessman.
As the current lawsuit wrangles through the courts, investors are reminded that CNS is basically a one-product company. TheraPatch, a pain-relief product, was launched last year and the company anticipates that the product's annual sales could grow to $5 million. CNS declined to say when that goal would be met; currently the Breathe Right product generates about $49 million in annual sales.
While an allergy-relief gel is in the works, Cohen admits that the company has no definite plans to launch a new product in 1997.
A final fixation of the shorts is CNS's huge ad budget. Breathe Right's sports tie-in provides the company with invaluable exposure. The product gets tons of free advertising as fans watch athletes like Rice storm the end zone.
But CNS tries to capitalize on the exposure with its own ads. One of the smallest companies to advertise in the
, CNS will cough up about $1.2 million for a 30-second spot. That doesn't include the cost of filming the ad, which will offer humorous, non-sensical explanations of how the product works. (Think overall-clad pig farmer saying the product relies on magnetic forces as he holds a horseshoe to his face.)
Cohen makes no apologies for the company's hefty ad budget, which at more than $34 million in 1996 doubles what the firm spent in 1995.
By Suzanne Kapner