Quarter – Revenue – Earnings – Earn/Shr
2Q 10 -$15,985M – $5,617M – $0.38 ($11.7M in gov’t revenue)
1Q 10 -$15,379M – $5,819M – $0.40 ($11.0M in gov’t revenue)
Q4 09 – $6,687M – $677M – $0.05 ($3.2M in gov’t revenue)
Q3 09 – $5,971M – $1,330M – $0.10 ($3.0M in gov’t revenue, $654M in income tax benefit)
Q2 09 – $4,270M – $605M – $0.04 ($77k in gov’t revenue)

If we assume that government billings fall to maintenance levels of $750,000/qtr, a quarterly income statement looks like this:

Revenue: $4.8 MM
Gross Profit: $1.7M (35% gross margin)
SG&A: ~$2MM
Net Income: -0.32M

All of this assumes no new contract wins to offset the decline in revenues. Also assumes nothing comes of the following that was noted in the earnings release:
-5 year Federal Supply schedule contract by GSA
-Distribution & Pricing Agreement with Defense Supply Center
-VA Pilot Program
-Pharma manufacturer contracts ($25MM in revenue potential among 15 manufacturers)

There is still a lot of potential here, but I think the baseline is closer to break-even. I was looking at the quarter with the tax benefit and annualizing that number. Big mistake without digging deeper. Before I looked closer, I was thinking odds of 60/40 that this company takes off. Now I’m thinking more like 30/70. Probably not good odds, but it is a very speculative investment. I’m glad I don’t have a larger position.

Interested to hear how you get to 0.50 cents per share earnings power. 0.50 cents is 7 million dollars. At 30% tax rate (probably low) that’s 10 million pre-tax earnings. At 48% EBIT margin (equivalent to their margins in 2009 inclusive of the huge lump sum from Feds, outside of that period EBIT margins clocked in anywhere from -15% to +15%) that would imply $23 million in sales. If you assume they will get the $3 million in sales from the Federal contract’s maintenance period, you would be banking on 30% revenue growth (like for like on ex-contract revenues) for a company that has never achieved above 15% revenue growth (again, assuming this federal contract is a 1x event.) Even if you believed that was possible, do you think you’d want to characterize that achievement as something they can get to in normal course of business… plus have potential upside from **additional** contract wins?

To my mind, 0.50 cents earnings for SMED assumes some pretty great success already. Sure they may achieve it, you never know what rabbits they might pull out of their hat, but the stock is priced as if all of those maybes are in the bag. I can’t see how that’s a good risk/reward.