Downgrading Schering-Plough
Schering-Plough (SGP) is engaged in the development, manufacturing and marketing of pharmaceutical products around the world. The company focuses on prescription drugs, animal health, foot-care and sun-care products. In November 2007, Schering-Plough closed acquired Organon Bio for a mix of $15 billion in cash/debt/equity.
Our previous expectations of strong earnings growth as a result of outperformance of key drugs such as Remicade and Vytorin/Zetia have been substantially muted. Recent negative comments at ACC 2008 relative to Vytorin/Zetia as well as near-term risks are the basis for our rating downgrade. We have changed our recommendation on the shares from Buy to Hold and moved our target to a price of $16.
As of today's price, the stock is down about 25% since the ACC meeting. While we continue to be believers in the long-term future of the company, we see a significant amount of near-term risk, and recommend that investors don't buy at the discounted price. It's very difficult to gauge where prescriptions will go with the cholesterol drugs, and until there's more clarity on this we feel it s unlikely the shares will show a significant move up.
Furthermore, there are ongoing investigations into the way that Schering and Merck (MRK) marketed the drugs as well as accusations that the companies delayed the dissemination of the ENHANCE data, which may hang over the shares and limit the potential upside to the stock. We have downgraded our recommendation based on the likely significant drop in prescriptions for the company's blockbuster cholesterol drugs and substantial near-term risks mentioned above.
The stock currently trades at 10.9x our 2008 EPS estimate of $1.35. While this is a significant discount to the industry average of 15.5x, based on the significant near-term risks, we believe a substantial discount is justified. We see fair value at $16, or about 12x our 2008 EPS estimate of $1.35.
Iron Mountain Target Adjusted
While we remain encouraged by strength in Iron Mountain's (IRM) storage services business, much of the company's growth has been through acquisitions, which involves integration risk. This becomes more difficult with the company's growing revenue base as it will be required to make larger acquisitions.
Moreover, we are concerned about IRM s rising level of debt. We therefore maintain a Hold rating on IRM shares, and lower our six-month price target to $28.00. This is based on a P/S multiple of 1.8x our 2008 sales estimate, the high-end of its peer group range.
Shares of Iron Mountain are currently trading at 34.4x our 2008 earnings estimate of $0.77, representing a large premium to the industry mean and the S&P. On a P/S ratio, the stock is trading at 1.7x our 2008 sales estimate of $15.20 per share, also representing a premium to its industry mean and median.
IRM is a leading provider of information protection and storage services in North America, Latin America, Europe and the Pacific Rim.
