Breathing easy in the Big Easy
graphic January 31, 2002: 12:05 p.m. ET

Marshall Faulk wears Breathe Right nasal strips. But should you invest in the company that makes them?
By Staff Writer Paul R. La Monica
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NEW YORK (CNN/Money) - This Super Bowl Sunday, many pigskin prognosticators expect St. Louis Rams running back Marshall Faulk to have a big game.

And a company called CNS will be extremely happy if there are numerous close-ups of Faulk's nostrils flaring as he tries to navigate his way through the hard-hitting New England Patriots defense.

That's because CNS (CNXS: up $0.11 to $5.11, Research, Estimates) makes Breathe Right strips, those Band-Aid like adhesives that pry open your nostrils and allow you to breathe easier. Faulk wears them during games. So does teammate Leonard Little as well as New England Patriots running back Antowain Smith and defensive tackle Brandon Mitchell. In order to commemorate the Super Bowl, CNS has even produced limited edition strips for fans of the two teams: red and blue for the Patriots and blue and gold for the Rams.

Investors watching Sunday's game might be surprised to know that Breathe Right strips are made by a relatively small public company, not one of the consumer healthcare giants like Johnson & Johnson or American Home Products. But CNS has been an independent company fighting the Goliaths for several years now.

Tough times in the late 1990s

Breathe Right strips first became popular in the mid 1990s when several athletes, most notably future football Hall of Famer Jerry Rice, were shown wearing them on television. As a result, the company's sales soared from $2.8 million in 1994 to $85.9 million in 1996 and the stock shot up nearly 250 percent during those two years. (Although most people use Breathe Right strips not because they are fighting off would-be tacklers, but in order to fend off nudges in the middle of the night from loved ones tired of hearing their partner snore.)

But the company hit some hard times in the late 1990s as increased competition put a dent on sales, which declined in 1997, 1998 and 1999. CNS even reported a loss in 1999 and 2000. The stock, which hit a high of $25.88 in March, 1996, sank to a low of $2.75 in April, 1999. However, the company has experienced a renaissance lately, returning to profitability in 2001 on sales of $84 million. And the stock, which gained 53 percent in 2001, now trades at just under $5 a share. So what now for investors?

Although CNS has diversified somewhat - it now makes FiberChoice, chewable fiber tablets that help, uh, promote regularity and equine nasal strips (essentially Breathe Right for horses) called Flair - the Breathe Right brand is still CNS's biggest product. Breathe Right accounted for 90 percent of the company's sales in 2001.

CNS CEO Marti Morfitt says the company will unveil a new Breathe Right branded product in March. She would not say what it was except that it will not be a new nasal strip. The company already has a Breathe Right saline nasal spray.

Next quarter could be tough

The current quarter could be a challenging one for CNS, Super Bowl exposure notwithstanding. During its latest conference call CNS said that sales for the first quarter of 2001 will be lower than the same period last year and that earnings will come in anywhere between a 5 cent per share loss and 5 cent gain.

Three time Super Bowl champion Jerry Rice was one of the first NFL players to wear the Breathe Right strip.
Management also said it expects operating income for the next fiscal year (ending in March 2003) to come in between $6 million and $10 million. For a company as small as CNS, that's a huge swing. With only 14.1 million shares outstanding, that's a difference between earnings per share of 30 cents and earnings per share of 45 cents after taxes. The company expects revenue to come in between $85 million and $95 million.

Another factor that makes the stock a bit of a risk is the lack of Wall Street coverage. Only one analyst, for a small firm in Minneapolis, is covering the stock. And the average daily trading volume for the last three months is just 59,600 shares. So the stock isn't very liquid either.

Investors hope for a takeover

With all this in mind, some investors are hoping that CNS will look to sell out. "It's very difficult to have a small $100 million brand and compete for the long term," says Jeff Leerink, CEO of Leerink Swann & Co., a Boston based investment bank. "They could make a neat fill in acquisition for a larger consumer products company."

To that end, Procter & Gamble already has a partnership with CNS for mentholated Breathe Right nasal strips. These strips, which you literally scratch and sniff, release Vicks vapors. Procter & Gamble owns Vicks. And Schering Plough, which owns the Afrin brand of nasal sprays, could be a possible acquirer. Schering Plough tried to compete against CNS by launching a nasal strip called Clear Passage in 1998 but Schering Plough now has just 2 percent market share in this business.

Morfitt admits that the "When are you going to sell out?" question is one that she hears often. But she adds that for the time being the company is focused on staying independent, launching new products and remaining profitable.

Ultimately, though, investors may snub their noses at CNS if it continues to go it alone. graphic