On April 18th, New Market Technology, Inc. announced a phenomenal first quarter with net income up 38%. From just looking at the numbers, one would think the stock would shoot straight up. Take a look at the highlights from the release all around this was a fantastic quarter. 

Financial Report Highlights

Balance Sheet:

  • Cash position up 25% over last quarter ($3.3m v. $2.6m)
  • Stockholder's equity up 32% from year-end 2005 ($43.2 v. $32.8m)

Statement of Operations:

  • Revenue for 2006 up 55% from 2005 ($77.6m v. $50.1m)
  • Revenue for 4th quarter 2006 up 60% over 4th quarter 2005 ($24.5m v. $15.3m)
  • Gross profit for 2006 up 18% from 2005 ($21.9m v. $18.6m)
  • Operating expense percentage down, 22% of sales in 2006 v. 31% of sales in 2005
  • Net income (before currency translation) for 2006 up 38% from 2005 ($4.0m v. $2.9m)
  • Net income for 4th quarter 2006 up 18% over 4th quarter 2005 ($1.7m v. $1.5m)

That was 2 weeks ago and the stock is actually down. So what gives?

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Newmarket Technologies Inc.  OTCBB NMKT - Chart

Beacon Equity Research has a price target of $0.78 on the stock.  On the surface we like the stock, and feel it is one of Beacon's better picks.  We don't doubt it can hit 0.78 but we think even if it went to $0.78 it is not sustainable. 

We may buy a tiny ammount on a new 52 week high, but definitely we would not buy it here.  Newmarket is a service business, they do custom integrations for large corporate customers.  We prefer product and brand driven companies.  We liken this type of service work to a corporate version of shining shoes.  The problems with service business are multiple.  To name a few:  you never build a brand, it is difficult to sell the business, and losing contracts means your sales go down as quickly as they go up. 

Technically, the stock is showing really poor relative strength.  The market is hitting new highs, and this stock with their best quarter in history cannot get out of its own way.  That is not good.

That being said, this is still a nice well run business, with a decent balance sheet, and is showing nice earnings so far.  Good job Philip Verges, and Philip Rauch.