Streetwise

Lauren Rudd

Sunday, January 9, 2011

Are These Two "ugly ducklings" Now Swans?

In the story of “The Ugly Duckling” by Hans Christian Andersen, a homely little bird matures into a graceful swan. The story comes to mind once again because of two companies that were “ugly ducklings” a year ago. The question is have they have matured into beautiful swans in the ensuing year? Perhaps...see what you think.

First up is Hologic Corporation (HOLX), a key provider in the women's health arena. For its fiscal year ended September 25, 2010, Hologic’s revenues increased to $1.68 billion, as compared to $1.64 billion a year ago. This increase was primarily attributable to growth in service revenue, GYN surgical and diagnostic product sales.

At the same time, the company reported a net loss of $62.8 million, or $0.24 per share, as compared with a net loss of $2.22 billion, or $8.64 per share in 2009. However, included in both numbers are charges for the amortization of intangible assets, a non-cash interest expense, charges for the impairment of goodwill and intangible assets, patent litigation settlement charges and acquisition-related costs and charges.

The Company's non-GAAP 2010 adjusted net income, which eliminates non-cash and one-time charges, was $308.0 million compared to $303.9 million in fiscal 2009, while non-GAAP net income per share for 2010 was $1.18.

A year ago my 2010 earnings estimate (non-GAAP) was $1.26 per share with a 12-month target price on the shares of $17.50, for a potential capital gain back then of 17 percent. The shares recently closed at $19.08, well exceeding my target. Still, non-GAAP earnings were a bit lighter than expected.

Looking at the intrinsic value of the shares, the conservative free cash flow to the firm methodology generates an intrinsic value of $37 per share, nearly double the recent closing price. However, negative earnings invalidate the discounted earnings approach.

Nonetheless, my earnings forecast for this year, ignoring non-cash and one-time expenses, is $1.28 per share and $1.38 for 2012. My 12-month target price for the shares is $22 for a potential gain of 15 percent.

Next up is Teva Pharmaceutical (TEVA), a company that develops, produces and sells a range of generic and branded pharmaceuticals.

A key to Teva’s ongoing success is that it deals heavily with low cost generic medications. As Barron’s recently pointed out, Teva dominates a $93 billion generic-drug industry that could almost double in size by 2015.

At $52.14 per share, Teva's American depositary receipts are 25 percent off a record-high close in March of $65 amid worries about future earnings growth and the fate of its top-selling multiple sclerosis drug Copaxone. Copaxone is under siege from two other generic manufacturers.

Those fears are being overblown. With the drug maker poised to double in size over the next half decade, Teva deserves to trade at better than the 9.4 times forward earnings it now commands.

For the quarter ended September 30, 2010, Teva reported net sales of $4.3 billion, an increase of 20 percent over the comparable period in 2009. Net income was $1.1 billion, a 62 percent increase over a year ago, while earnings per share came in at $1.15, up 60 percent from the same period a year ago.

Exchange rate differences negatively impacted sales in the third quarter of 2010 by approximately $122 million compared to the third quarter of 2009 as a result of a decline in the value of certain European currencies relative to the dollar.

The intrinsic value of the shares using the free cash flow model is $158 per share as compared to a recent closing price of $52.14. However, once again we have difficulty with using the discounted earnings model, which yields an intrinsic value of $46 per share due to exchange rate issues.