Stem Cell Banking Stocks

Well my #1 pick in the Stem Cell sector, Cryo-Cell (CCEL) keeps flying. I´ve been long this stock for almost a year now. Am I selling yet? Not a chance. I´d look to buy some stock on any dip, as this recent rally appears to be quite different than past rallies which petered out after a couple of days. For some reason, people believe this stock is speculative. Maybe it is because it trades on the bulletin board. But since when is a company that is generating cash, and has over 100,000 clients and growing speculative? So why am I still bullish on CCEL?

First off, the company is one of two pure plays in the fast growing Stem Cell banking business. The other play, VIAC, is less of a pure play, since it also is involved in major research and development activities surrounding cord blood stem cells. Also, CCEL is profitable (more on that below), while VIAC remains in the red.

Note: If you are unfamiliar with the Stem Cell banking industry, it pays to read this article for a quick primer.

The whole Stem Cell sector will get a huge boost in 2006, when the Cord Blood Stem Cell bill finally passes in the Senate. What most people don´t know is that there are two types of stem cells, cord blood and embryonic. There are also two stem cell bills: one for embryonic and one for cord blood. The controversy merely surrounds embryonic stem cells. There is no disagreement as to the  cord blood stem cell bill. In fact, it seems certain that some sort of legistation will past next year creating a government-funded cord blood banking business. This will give a huge boost to the stem cell banking business and you can be sure that CCEL will benefit from this exposure.

As regards to profits at CCEL and the valuation. A look at the latest 10Q shows that CCEL is generating nearly $1 million in free cash flow a quarter right now (compare quarters sequentially). There are about 12 million shares outstanding. So the market value is about $48 million. Subtract out and you get a market value of about $40 million. Is 10-15X yearly Cash-Flow for an annuity-like business (when CCEL gets a client that client pays annual fees for the rest of his/her life) with growth potential a fair price? You bet and I actually believe it is extremely cheap.  The only risk here is that some discovery is made that casts a doubt on the viability of Stem Cell therapy. But, I think that is such a remote concern, since research continues to validate the tremendous possibilities of stem cell therapy. Yes, many medical doctors still laugh at the prospect of cord blood storage, but they are times years behind new therapies, and generally just prescribe the latest pharma drug. In other words, they are just as susceptible to marketing than the rest of us, and when a therapy becomes more accepted they will recommend it.

So what´s the stock worth? I think the stock is a double next year, assuming the stem cell bill passes in the Senate. What´s the other kicker for CCEL? Watch the stock move off the bulletin board and onto Nasdaq in 2006. Bottom line, hang on to this gamble.