Too Early for deCODE to Deliver
deCODE genetics, Inc. (DCGN) is a biopharmaceutical company that uses genetics to develop drugs, diagnostics, and pharmacogenetics for the healthcare industry. We were pleased to see the positive phase II data on candidate DG-031 and the phase IIa data on DG-051.
However, the company announced the voluntary suspension of the phase III trial for DG-031 due to manufacturing problems in early October 2006. We believe DCGN will trend sideways over the next few months as investors await a partnership announcement for DG-031, DG-041 and DG-051. We would also like to see the financial performance of the diagnostics tests launched recently.
We believe the shares offer substantial upside potential, but do not expect significant upward movement in the near-term due to risks associated with the companyâ?s drug development program. We believe that the risk/reward profile is balanced for investors in deCODE at the current level. We are optimistic that clinical results will demonstrate the viability of DG031 for reducing cardiovascular events, but we would like to see more large-scale data before we become bullish on the shares.
Our target price is $2, which represents a market cap of $150 million based on our 2010 shares outstanding of 75 million. The target price corresponds to a P/S multiple of 4.6x our estimated revenue of $110 million in 2010, discounted back two years using a discount rate of 25 per cent. We believe the high discount rate is warranted because commercialization of deCODEâ?s drug candidates is still a few years away.
Costs Balance New BWA Products
BorgWarner, Inc. (BWA) is expected to benefit from the growing demand for its strong technology-based product portfolio. About $1.95 billion of new powertrain business is expected between 2008 and 2010. Also, BWA has healthy financials with low debt and has further taken initiatives to maintain margins in the challenging North American industry environment. However, due to high raw material costs and price concessions to automotive makers, we rate the shares a Hold.
On May 1, 2008, BorgWarner reported first quarter 2008 results. For the quarter, sales were up 17% to $1,498.9 million, compared with $1,277.8 million in first quarter 2007. Net income in the quarter was $88.7 million, or $0.75 per diluted share, compared with $58.4 million, or $0.50 per diluted share in first quarter 2007 adjusted for the two-for-one stock split on December 17, 2007.
Earlier, on April 30, 2008, BorgWarner announced that its board of directors has authorized the purchase of up to five million shares of the company's common stock. The new authorization was made in anticipation of exhausting the limited number of shares that remain available under the previous program authorized in 2000.
Management expects revenues of $1.95 billion from the net new powertrain business for 2008 through 2010, an 11% increase over its previous three-year new business. Demand for the company's environmentally friendly technologies such as turbochargers and dual-clutch transmission technology continue to drive a growth rate for the company that exceeds that of the auto industry. About 50% of the new business is expected to come from Europe and 20% from North America over the next three years.
Currently, shares of BWA are trading at 17.9x our 2008 EPS estimate of $2.84. We are rating BWAâ?s stock a Hold, as the impressive slew of new product launches is burdened with high raw material prices. Our cautious approach is reflected in our six-month target price of $50, which is derived by using our 2008 EPS estimate, and a forward multiple of 17.6x.
Pride Int'l Keeps It Coming
Pride International, Inc.â?s (PDE) first-quarter 2008 results came in better than expected, reflecting higher day-rates for its deepwater and mid-water rigs, partly offset by jack-up softness. Revenue and operating earnings from the companyâ?s deepwater fleet increased 19% and 35% from the previous quarter, respectively.
