Sometimes, what counts are the numbers behind the numbers.
Two AIM-listed stocks delivered a double-dose of good news today. Shaking off the gloom, international online market research group BrainJuicer (LSE: BJU) reported sparkling results for 2009, as did speciality pharmaceutical company Plethora Solutions Holdings (LSE: PLE).
Both sets of results pleased the market. BrainJuicer's shares shot up 7%, while Plethora posted a gain of 3%.
But is either share a buy? Let's look at the numbers, and then at the numbers behind the numbers, and see.
BrainJuicer
10-year old BrainJuicer offers its blue-chip client base a suite of market research tools -- software, analysis, and research laboratories. Clients include such consumer goods luminaries as Chivas Brothers, Nestlé, Unilever (LSE: ULVR) and Nike.
Highlights of the results included:
- 27% revenue growth
- 27% growth in operating profit
- 21% increase in pre‑tax profit
- 22% growth in diluted earnings per share
- 36% increase in cash reserves, and no debt
- 1.3p final dividend proposed, making 1.9p for the year
Good results, then -- and the company sounds pretty bullish about future prospects: overseas earnings now exceed UK earnings; new Swiss and German offices were profitable in their first year, and there is strong growth in the US.
Plethora Solutions Holdings
Plethora is a company that provides Fool writers with a rare opportunity to include within their sentences phrases such as urinary incontinence, erectile dysfunction and premature ejaculation. The company specialises in developing treatments for these and other urological disorders -- affecting both genders -- including several I'd never heard of.
The results were undoubtedly pleasing to investors:
- Revenues up 2,665%
- Debt down from £31 million to £2.2 million
- Operating costs down 42%
- A first-ever profit of £9.6 million, versus a loss of £16.4 million last year
Better still, perhaps, the company has licensed some products to partners, leading to a stream of additional royalty revenues flowing through to the bottom line in the coming years.
But are they a buy?
There's no arguing with either set of results. Or with the fact that these are 'classic' AIM shares: small, fast-growing tech-oriented businesses set up to exploit niche opportunities. And on a headline level, it's easy to see why the market liked what it saw.
But that doesn't make either company an automatic buy. Both companies, it's fair to say, have their downsides as well as their undoubted upsides.
Let's take a look at some of them.
Warning flags
* Size: both companies are small -- very small. BrainJuicer has a market cap of £19 million, while Plethora is even smaller, at just £6 million. Even by AIM standards, that is tiny.
Not only does this mean that they will be less resilient to adverse conditions than their larger peers, it also means that even limited amounts of buying can quickly drive up the price. Conversely, small-scale selling can quickly drive the price down.
* Spread: AIM shares are known for their high spread -- the difference between the quoted 'buy' price, in other words, and the quoted 'sell' price.
Plethora has a spread of over 12%, meaning that the shares price would have to go up by that much before the buyer would break even -- and spreads are even higher for shares bought and sold in life-changing lots. While BrainJuicer's spread is lower, it's still almost 6%.
* Share concentration: 5.3 million of BrainJuicer's 13 million listed shares are held by a single individual -- chief executive John Kearon.
There are obvious risks when a single dominant individual holds over 40% of a company's shares, including the risk that the company could be de-listed and taken private. It's also harder to sack an individual who owns such a chunk of the business.
Note, I'm not saying that Mr. Kearon would take the company private, or that he has in any way done anything that investors might want to sack him for -- just pointing out the risks for investors when such circumstances apply.
The risk is certainly lower at Plethora: although two directors each own 486,594 shares, there are a comforting 42 million of the things in circulation. What's more, when looking at director holdings, it is encouraging to see that Plethora's directors backed a recent fund-raising with chunks of their own wealth.
Forced to choose
As I've said before, I'm not a huge fan of AIM shares, precisely because of the difficulty of weighing up risks like these. That said, neither company is foreign-based, or engaged in speculative mining or oil-based ventures, so that's good news -- these are two particular red flags in my case.
Given a bit more research, I'd feel reasonably comfortable investing in either business, with a slight preference for Plethora, simply because of its license revenues and lack of dominant shareholder.
But it's undeniably the more speculative of the two: BrainJuicer has an established business model, is dividend-paying and has sounder finances. In short, as with many things in life, you pay your money and make your choice.
More from Malcolm Wheatley:
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