2 Microcaps With Gross Margin Catalysts
Recall that the Zacks microcap screening process focuses on Gross Profit/Total Assets i.e. Marx ratio, for evaluating microcap stocks without analyst estimates. Academic evidence suggests this ratio has predictive performance power. See https://www.zacks.com/stock/research/microcap-research for a more detailed explanation of this process.
With this in mind, here we focus on 2 microcaps with catalysts for material Gross Profit improvement.
Champions Oncology, Inc. (CSBR), is a technology-enabled research organization engaged in developing technology solutions for drug discovery and development through computational and experimental research platforms.
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In the latest quarter, Gross Margin declined to 47% from 61% a year earlier as cost of oncology revenues increased 33.5% to $8.8 million. Management attributed the lower margin to more than $2 million of outsourced radiolabeling work and the lack of prior-year data licensing revenue.
However, Champions Oncology (CSBR) believes Gross Margin should improve as more radiolabeling work transitions in-house, thus providing a tangible lever for cost leverage.
The stock is currently screening very high due to its relatively high Marx ratio. However, we still remain on the sidelines at Neutral, waiting for evidence of revenue growth from its current investment mode.
The other microcap, Capstone Energy+, Inc. (CEPL), is a provider of behind-the-meter clean energy solutions for industrial and commercial customers, offering oil-free, friction-free microturbine-based power generation systems, Energy-as-a-Service (EaaS) solutions, rentals, long-term service agreements, and related parts and accessories.
Capstone Energy+, Inc. (CEPL) has arguably caught the attention of investors as its microturbine technology addresses the thematic issue of power grid stress, as well as having data center power applications.
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In the latest quarter, Gross Margin improved to 30.1% from 27.8%. Importantly, the company showcased a design-for-manufacturing and assembly initiative that reduced the production cost of its microturbine engine module frame by 59%, lowering the cost per unit from $1,212 to $413 without compromising quality or reliability.
Such a concrete and specific example of cost savings from design and process improvements is rare, in my opinion. This should bode well for Gross Margin going forward.
Zacks currently has an Outperform rating for CEPL.
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Champions Oncology, Inc. (CSBR): Free Stock Analysis Report
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This article originally published on Zacks Investment Research (zacks.com).
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