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Capitalizing on natural cosmetics: Ceapro's potential moonshot

You've probably never heard of beta-glucan or avenanthramides but you've surely heard of the products you can find them in: Burt's Bees, Jergens, Dove, Coppertone, Neutrogena and of course Aveeno, which is pitched by Jennifer Aniston.

You've probably never heard of a company called Ceapro Inc. either, but if you like fast-growing, profitable biotech companies sporting a cheap stock, you should get to know this one. It's a little gem with breathtaking upside and limited downside.

Ceapro, you've probably guessed by now, produces and sells the two compounds mentioned above, which it extracts from oats using a proprietary low-temperature technique.

These compounds can be sensitive to heat, so the company's technology is critical. It also bestows a barrier to entry on Ceapro's business, which is evident in the company's profitability.

Gross margins run in the 70-percent range and are actually improving as production increases.

Business, meanwhile, is brisk.

Sales for the first nine months of this year were up more than 50 per cent with operating income tripling in the same period.

Despite these statistics, the stock is quoted at a measly 15 times trailing earnings.

If the company's grows at only half its current rate, the stock is going to do very well. But there are other reasons to be bullish.

First, growth could be better than expected. Management guides for 20 per cent to 25 per cent on sales but it has doubled that pace this year. While Ceapro has inked deals with Johnson & Johnson, for example, there are many other large cosmetics companies taking an interest. A big contract with, say, Procter & Gamble Co. would produce a massive increase in profit.

It's nice to know that Ceapro recently commissioned a stateof-the-art plant in their hometown of Edmonton that chief executive officer Gilles Gagnon says can produce 10 times the current level of revenue. Given that the company wouldn't require much investment to sharply up production, it should churn out free cash flow as it grows its profit.

Then there's the prospect of expanding the product line. The company's know-how can and will be applied to both new forms of beta-glucan and avenanthramides and to new extracts. In a world increasingly averse to chemicals, plant extracts are becoming highly sought after, so Ceapro is in the sweet spot.

Finally, there's the possibility of explosive returns for shareholders if a couple of investigations into the potential for its two key extracts are positive. Beta-glucan is a water-soluble compound that acts as a natural moisture barrier and therefore helps ease dry and itchy skin. It also smooths wrinkles.

But on a more serious note, there is evidence that it can lower cholesterol, and Ceapro is investigating this possibility with trials. Should they prove successful, the company would have access to a market measured in the billions.

Avenanthramide has anti-itch and anti-inflammation properties. Human clinical studies have shown that dietary avenanthramide supplements significantly reduced inflammation. Inflammation is a nasty brute so there is plenty of clinical upside for this extract as well, which the company is pursuing.

So why is the stock unloved? I think part of it is that the company is based in a place that is often ignored by investment banks. It's also small, for now at least. And the story has been around a long time but only recently, when Mr. Gagnon took over, has it tasted success.

But as it builds an audience, it should trade at a better multiple.

Mr. Gagnon is a seasoned biotech expert with plenty of experience and a strong Rolodex, as evidenced by how quickly Ceapro has grown since his arrival.

I'm confident that he'll be able to keep expanding the company's current business but also take it into new lines to the benefit of shareholders, of which I'm one.

He's confident too, and with a little luck we might even get a moonshot.

Fabrice Taylor, CFA, publishes the President's Club investment letter, for which The Globe and Mail provides marketing services and receives compensation.

Ceapro (CZO)

Close: $1.60, up 2¢

© The Globe and Mail

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