Alpharma Still Transitioning
We are maintaining our Sell rating on Alpharma, Inc. (ALO), which is focusing on establishing itself as a specialty pharmaceuticals company after the sale of its generics and active pharmaceutical ingredients business. Though we view this move as a positive, we remain concerned about the company's growth prospects. While first-quarter results beat Wall Street expectations, we are not certain of the sustainability of this performance.
We believe 2008 will be another transitional year for Alpharma, as it continues to focus on growing its pharmaceuticals business. While growth should return in 2009, we expect earnings to decline significantly in the current year, mainly due to increased selling, general and administrative expenses for the launch of its painkiller Flector Patch.
Although the company is working on establishing long-term growth, a lot depends on its ability to execute its plans successfully. While Alpharma reported that Flector is off to a strong start, we remain concerned about the sustainability of these strong prescription trends. Meanwhile, we are also skeptical of Kadian's growth prospects, given the intense competition from several other extended-release morphine products.
In the absence of any potential catalysts, we believe investor focus will remain on Alpharma's ability to ramp Flector Patch sales and maintain Kadian growth. Alpharma shares are currently trading at 81.6x our estimated calendar year 2008 EPS of $0.31. We believe the shares are over-valued at current levels and set a $20 price target based on 25.3x our 2009 EPS estimate.
Restrictions Challenge Shanda
We keep our Hold recommendation on Chinese online gaming company Shanda Interactive Entertainment Ltd. (SNDA), as we remain concerned about how long it can maintain this growth momentum without new, hit games in this competitive market. Moreover, the industry faces Chinese government regulations. Near term, we believe Shanda's second-quarter revenue will be affected by its decision to suspend game operation for three days after the Sichuang earthquake.
Shanda operates in a highly competitive and rapidly changing industry. To extend its business, the company will have to contend with players like NetEase (NTES ), Giant Interactive (GA), The9 Ltd (NCTY) and Perfect World (PWRD). The company is also facing tough competition from other Internet portals like QQ.com and Sohu.com (SOHU), which also have developed and operated some hit online games.
Moreover, to restrict online-game addiction, especially of underage players, the Chinese government has made it mandatory for online-game providers to limit the use to three hours per session. Besides, the game players are also required to use their real name to get permission. We think this might negative impact gaming companies.
Based on our earnings estimates for fiscal 2008 and 2009, the stock trades far below the industry average. Using a P/E multiple of 13.0x our fiscal year 2009 earnings per ADS estimate yields a target price of $34, which we believe reflects Shanda's prospects.
Sonic Solutions Being Watched
Sonic Solutions (SNIC) creates software tools that enable the recording and storage of digital audio and video content in various compact disc (CD), digital video disc (DVD) and other related formats. March results were postponed due to an ongoing options inquiry, and the firm has scheduled a conference call for June 10th, 2008.
Toshiba's recent announcement that it will halt HD DVD and commit to the Blu-ray format is perhaps the final battle in the format wars.
