The company's senior management team consists of three individuals: Ingrid Jackel (CEO), Jeff Rogers (President), and Joseph J. Jaeger (CFO). The senior management team has considerable experience and expertise, with an average of 19 years of experience in the cosmetics industry. The loss of any of these individuals could adversely affect its operations and profitability.

Since its IPO in November 2006, Physicians Formula's stock has traded in a wide P/E range of 13.1 to 46.3. The company has exhibited an above-average sales growth rate, but earnings growth has lagged sales growth due to the incremental cost of being a public company, and the costs required to launch new products and maintain shelf space. The stock is selling at the low-end of the historical range due to the management's strategy to aggressively spend on advertising and promotional activities and the expectation of poor seasonal sales. The target price is $10.25 per share based on a P/E of 16.

SurModics Boosted by Merck Deal

SurModics, Inc.'s (SRDX) acquisition of profitable companies, the I-vation deal with Merck (MRK), that provided the company with a significant $308 million, and growth in other operating segments have enabled the company to reduce its dependence on Cypher stent sales.

Going forward, in spite of falling Cypher stent sales, the diversified revenue stream should enable the company to post sustainable growth. However, higher operating expenses accompany the shift in the company's revenue base. We maintain our Hold rating on the stock with a target price of $46.00.

For the third quarter of fiscal 2008, SurModics' revenue was $24.3 million, an increase of 37% from $17.8 million in the year-earlier period. Consistent with the first two quarters, earnings growth did not keep pace with revenue growth primarily because of the accounting treatment relating to the company's Merck agreement, and a changing mix of revenue sources.

We are impressed with SurModics' efforts to diversify its revenue base. While the recent acquisitions will enable the company to deliver strong topline growth, the company is utilizing its cash position to enter into development agreements and share repurchase programs.

However, the shift in revenue base has exposed the company to higher operating expenses. We believe that the company should look for ways to grow sales at a higher pace than its expenses, resulting in higher operating margins.