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According to Oppenheimer (OPY) bank analyst Chris Kotowski, who took over when famed analyst Meredith Whitney started her own firm, companies selling stock to raise capital will be a boon to investment banks in the second quarter. Kotowski’s estimates that U.S. firms sold about $122.6 billion worth of stock in the quarter, about 9 times greater than the previous quarter and twice the quarterly average since 2005. Obviously, this is great news for investment banks as the fees associated with these secondary offerings will boost investment banking revenue beyond where it was in the first quarter. His projections were the subject of Bloomberg’s Chart of the Day:
We have noted in previous posts that the rally in equity markets provided the perfect opportunity for companies lacking capital to strengthen their balance sheets by offering shares to the market. Investors seemed to have a bottomless appetite for the additional shares, as the announced secondary offerings were coming in fast and furious in May. Perhaps some investors were following the logic of Jim Cramer, who advised investors to buy on the dips that follow these offerings because the company would be better capitalized. Not to mention Cramer is bullish on the market in general right now. Even investment banks themselves were keen on the idea of secondary offerings as Goldman Sachs (GS) and JP Morgan (JPM) were among the companies that tapped the well in the second quarter.
This new found growth in investment banks’ revenue is also being spread around a smaller number of firms after the attrition in the industry that has occurred with the fall of Lehman Brothers and Bear Stearns. No doubt, this is one of the reasons that Kotowski is bullish on many investment banks. At Ockham, our methodology is much more cautious in regards to many of these financial firms because there stocks have advanced, and often doubled or more, well ahead of a corresponding fundamental improvement. Reports like this suggest that the fundamental strength is beginning to return, but these stocks do not fit our value investing philosophy at current price levels.
Ockham Research Staff @ July 2, 2009
Company Research
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“Big percentage move on the down side out of Sepracor. It is down about 16% in the pre-market this morning… There’s Sepracor, $14.85 big drop as a depression drug that failed in a clinical trial. That’s why that stock is getting hammered ahead of the open.” Fox Business Network Money For Breakfast 7/2/2009
Drug maker Sepracor (SEPR) received some disappointing news today in regards to a clinical trial of a drug used to treat depression. The preliminary study showed that 514 patients taking the drug, called SEP-225289, did not show any significant improvement in symptoms of depression after eight weeks of treatment, judging by the standards of the Hamilton Depression Rating Scale. As if that disappointment was not bad enough, Sepracor received additional news about clinical trials of the pediatric Lunesta. Lunesta is the company’s best selling drug, bringing in over $600 million or nearly 46% of the company’s revenue in 2008. The FDA has placed a “clinical hold” on the trials due to non clinical issues that could effect the use of Lunesta on children.
The good news is that the clinical hold should have no effect on the use of the Lunesta among adults, otherwise Sepracor’s stock would be off even more than 18% with about half of their revenue in question. If pediatric Lunesta is eventually approved it would serve to extend the patents for the drug and preserve that revenue stream for even longer. However, as of right now the patents will not expire until 2012, so this set back does not effect our revenue or profit projections for the next few years.
The set back in the depression drug trial certainly does hurt the pipeline of Sepracor, but these trials are still in early phases and that drug likely would not have been brought to market for years. As our readers know, Ockham has a value investing philosophy at our core, and we see this drop as a potential opportunity. The company has declined hugely over the last two years partially because growth in Lunesta has flattened. Furthermore, company-wide sales are expected to drop only about 6% in 2009. Even though sales are slumping, the stock has fallen much, much faster. For example, SEPR over the past ten years has traded at 4.4x to 12x times sales per share, with the current metric only 1.2x it looks Undervalued in these terms. While, today’s news is not good for the company’s future sales prospects, it appears to us that the stock has fallen too far in the past to ignore. Sepracor has not rest all of its hopes in these two drugs; on the contrary, management is hopeful that Brovana will begin to live up to its blockbuster billing and that new drugs Alvesco and Omnaris could provide stable growth as well.
Drug companies can be very risky, but with Sepracor trading only slightly above its 52-week low, the market has priced in a lot of bad news. Coming into today, the most conservative of analysts’ estimates called for profit of $2.23 for 2009, the stock is only trading at a multiple of only 6.5.
Ockham Research Staff @ July 2, 2009
