Citi Trends in Appealing Niche
Citi Trends, Inc. (CTRN) reported better-than-expected fourth quarter earnings per share of $0.59. Management's guidance was $0.42-$0.46 and our estimate was $0.46. The upside was due to a lower-than-expected tax rate and compensation accrual.
Even without those two benefits, Citi Trends would have reported earnings at the high end of its EPS guidance. Another positive was inventories, which were up 12% year-over-year. That compares favorably with the company's 20% square footage growth.
We maintain our 2008 EPS estimate of $1.17 and introduce our 2009 EPS estimate of $1.37. We maintain our Buy rating and $25 target price on Citi Trends because of its appealing sales niche, strong double-digit growth potential and attractive valuation. The company estimates 2008 earnings in a range of $1.10 to $1.15 per diluted share. This guidance is based upon an anticipated 2008 comparable-store sales increase of 2% to 3%. For the year, the company expects to increase selling square footage by at least 15 per cent.
CTRN shares are attractively-priced at 13.1x our fiscal 2008 EPS estimate and 11.2x our fiscal 2009 EPS estimate. This is well below our 20% estimate of its long-term earnings growth. We think the company's long-term growth potential warrants a premium price-to-earnings multiple. Even so, the company's earnings disappointments through most of 2007 reduced investor confidence in the company, and that could keep a lid on the stock's P/E multiple. As a result, our six-month target price is $25, which represents a P/E-to-growth ratio of roughly 1x our 2008 EPS estimate.
Maintaining Our Buy on Alkermes
Alkermes, Inc. (ALKS) is a drug delivery biotech company which utilizes specialized drug delivery technologies to develop drugs for the treatment of some major diseases. Its expertise in the area of drug delivery has allowed it to develop a pipeline of extended release injectable and pulmonary drug products for the healthcare industry.
While Eli Lilly's (LLY) termination of the AIR Insulin program is a major blow to the clinical pipeline, we are optimistic about a number of mid-to-late-stage candidates. Alkermes achieved profitability in fiscal 2007, and given the company's cash-rich position, we expect to see strong top-line growth in the coming years.
We maintain our Buy rating on Alkermes shares with a target price of $18. Alkermes is one of a handful of biotechnology and drug delivery companies that have achieved profitability. With two strong marketing partners [Johnson & Johnson (JNJ) and Cephalon, Inc. (CEPH)] and promising pipeline candidates, we expect the company to remain profitable going forward.
We expect the rest of 2008 to be an eventful year for the company. 2008 will mark the initiation of the phase III opiate dependence study for Vivitrol, initiation of the marketing trials for Exenatide LAR and initiation of clinical trials for ALKS 27, ALKS 29 and ALKS 33 -- coupled with the advancement of a preclinical candidate into clinical trials! While 2008 promises to be event-driven year, 2009 could be a result-driven year for the company, with the company set to reap significant rewards for the investment in its pipeline.
The acquisition of Reliant Pharmaceuticals by GlaxoSmithKline (GSK) has provided Alkermes with $174 million cash for the five million shares the company held in Reliant.
