Outlook Dims on Brightpoint
We downgrade our recommendation to Hold with a reduced valuation target for Brightpoint (CELL), a leading distributor of devices and logistic services to the wireless industry, following disappointing first quarter 2008 financial results. Revenues were significantly lower on a sequential quarter basis with business loss in the European and Middle-East regions. Net earnings were also strained as operating expenses soared following the company's two recently concluded acquisitions.
Looking forward, we expect that recent weakness in the global economy may generate further short-term sales challenges. Nokia (NOK) and Sony-Ericsson (SNE)-(ERIC), the two major mobile handset developers, announced expectation soft demand in 2008 supporting our forecast. The company's tight operating margin condition may also limit investments in new business endeavors. However, two recently concluded distribution deals with Research In Motion (RIMM) and HTC Corp. (HTC) may generate future business improvements.
Brightpoint is trading at 14.1x to our estimated earnings for 2008, which represents a discount to the forward P/E ratio for the S&P 500 but a premium to the peer group. However, with respect to P/S and EV/S metrics, the stock is trading below the industry average. We believe this valuation discount reflects the company's disappointing first quarter results coupled with a challenging business environment. According to our assessment, business volatility will continue for the remainder of 2008 and, therefore, we reduce our rating to a Hold with six-month target price of $12, based on 0.19x P/S to our fiscal 2008 revenue estimates, closer to the peers.
Buy-Rated Pozen Worth the Risks
Pozen, Inc. (POZN)and partner GlaxoSmithKline (GSK) announced in mid-April that the U.S. Food and Drug Administration (FDA) has approved Treximet for the acute treatment of migraine attacks with or without aura in adults. The product should become commercially available here in May 2008.
The news is a big positive for Pozen. Besides the $20 million milestone from Glaxo, Pozen will start receiving royalties on Treximet sales here in the second quarter. Couple that with expected positive newsflow on the rest of the pipeline, and we remain very bullish on the future prospects for Pozen. We are maintaining our Buy rating and increasing our price target to $22 per share.
Pozen has only 35 employees. The company has no manufacturing, no sales force, no significant internal R&D costs and very low overhead. Based on the royalties from Treximet alone, Pozen should be able to deliver positive operating cash flow in 2009. We expect the second quarter 2008 will be positive with respect to EPS and cash-flow based on the $20 million Glaxo milestone on the approval of Treximet.
Biotechnology stock investing carries significant risk. Besides the obvious drug development risk, stocks in the industry also have significant regulatory and financing risk. Thus, the ideal situation to be in from a company standpoint is to have low product development risk, low regulatory risk, have plenty of cash (or at least be operating cash-flow positive), and have big catalysts head.
However, by 2010 Pozen should be generating significant free cash-flow. We think that makes the company an attractive acquisition target for Glaxo, AstraZeneca Plc (AZN), or anyone else. Finally, besides the upside expected from Glaxo reporting strong Treximet sales in the coming quarters, Pozen is expected to sign a development partner on PA-325/40 in 2008.
We remind investors that the PN-400 deal with AstraZeneca was $375 million. PA-325/40 could be similar in size.
