We believe Sangamo will continue to form research and development agreements with major pharmaceutical and biotech companies to monetize its technology. Our investment thesis relies on Sangamo's very intriguing, potentially powerful, product development technology. We use relative valuation metrics to value Sangamo shares. We believe Sangamo shares are undervalued compared to its peers.
Upping Ests on Hold-Rated Baxter
Baxter International, Inc.'s (BAX) first quarter results beat our estimates on slightly higher revenues and gross margin. A lower effective tax rate offset operating margin pressures. Despite strong comparisons in early 2008, management expects 8% revenue growth and EPS growth of 14-16% in 2008. Guidance assumes mid-2008 U.S. re-entry of COLLEAGUE and 27% growth in vaccines. However, it was the lower tax rate that offset increased operating margin pressure.
The company announced that its Board of Directors has approved the repurchase of an additional $2 billion of the company's common stock to be executed upon completion of the company's existing share repurchase authorization. Baxter has less than $700 million of remaining authorization under its previous $2 billion share repurchase program that was authorized in March 2007. Shares will be repurchased in the open market at times and amounts determined by management based on its evaluation of market conditions and other factors.
We are increasing our estimates to reflect stronger product sales, the re-entry of COLLEAGUE and continued operating improvement. Our 2008 EPS estimate is within management's $3.18-$3.24 guided range. We believe BAX should trade in-line with the group P/E average of 20x 2008 and 1.6x 2008 P/E/G. We rate the shares as a Hold, and at roughly 20x our $3.21 2008 EPS estimate, equivalent to a 1.6x 2008 P/E/G, we believe BAX is fairly valued at $64.
Castle Brands Target Set at $1
Castle Brands (ROX) is a small capitalization company in the premium spirits industry. The company has an established distribution network in the United States. Despite rapid sales growth garnered through strategic relationships, joint ventures and acquisitions, the company has consistently operated at a loss, being funded by financing activities, including its IPO in April, 2006 and a private placement in May, 2007.
The value of the company is in its distribution network and the national distribution agreements for certain brand name premium spirits. The stock's rating is a Hold.
Since the company has consistently operated at a loss and with negative operating cash flow, the stock is best valued on a price-to-sales basis. Since going public, the stock has traded between 0.49 and 3.03 times sales. The stock is currently selling at a P/S multiple of 0.49.
In light of the company's poor earnings record and management's plan to aggressively spend on advertising and promotional activities, the company is not expected to deliver positive earnings results in the near future. However, improved case sales should drive revenue growth and this small capitalization company is building a franchise. The target price is $1.00 per share based on a price-to-sales ratio of 0.55.
