From Scott & Stringfellow _ We believe the Market is way too beat-up by earnings misses elsewhere in the CRO sector and is punishing PPDI shares (down >20% at this moment) in a "sell first, ask questions later" reaction to the surprise. Because of Hurricane Floyd, which has taken aim right on the Company's Wilmington (NC) headquarters, contacts are scarce (and in fact management
cancelled a previously scheduled appearance at a NY investor conference, possibly adding to uncertainty). We hate to be Pollyanna-ish, but believe the emotional sell-off is a
buying opportunity. We recognize many clients will prefer a safer approach, so this advice would not be for our less aggressive accounts
_ We believe the pharmaceutical outsourcing trend is intact (see Snyder Communications' significant contract sales win today), we believe PPDI's strong second quarter (revenue up 33%, EPS a penny above expectations, backlog almost 50% above last year, etc) suggests our +53% third quarter is reasonable even
if not guaranteed, and we believe last week's announcement of preliminary statistical success for dapoxetine (in-development with Eli Lilly for its promise of lifestyle enhancement) indicates the once-controversial discovery strategy has merit.
_ The Market obviously does not believe our $1.57 year 2000 estimate. At $15, we see no need for heroic assumptions. In the spirit of wiping the slate clean, and recognizing margin pressure among competitors, we'll run the risk of
really confusing readers/sending the wrong signal by lowering our year 2000 EPS forecast to 1.50.
_ If achieved, in our opinion that would translate into gains in excess of 100% in 12-18 months, for investors willing to lean against the wind today. Our new, somewhat more "conservative" target is $37. We reiterate our Strong Buy recommendation.
In the "what next?" category, PPDI today announced its President and COO, Tom
D'Alonzo, is retiring from the company. This followed a regularly scheduled
Board meeting yesterday. The news is a surprise to us and, we believe, to many
PPDI insiders. We do not wish to sugar coat the announcement as "good news,"
but we take exception to the Market's initial and perhaps natural reaction that
it must therefore mean bad news is ahead. The $100 million of market value
wiped out so far today puts a hefty price tag on Mr. D'Alonzo's single
contributions. We hope we were not heretofore recommending a stock so
dependent upon one individual, among 3,000.
Facts are scarce, at least as regards this announcement. Hurricane Floyd is
bearing down on the North Carolina coast. We have done our duty and bothered
assistants in Mr. D'Alonzo's Research Triangle Park office, and rudely chased
down our regular investor contact, who is battening down the hatches at home
with his wife and young children. It would be rare (unprecedented in our
17-year career) for such persons to report to us, "As a matter of fact, this is
really bad news and signals disaster for the company. You should tell your
clients to sell their stock," but we have to report that the vibes we receive
(and consistently have received) regarding business trends and earnings are
positive. We stand by our 3Q and 1999 estimates, based simply on the facts of
on-target performance and demonstrated momentum to date.
Most everything else is pure speculation. Why is Mr. D'Alonzo, age 55,
leaving? We do not know. The undersigned authors would not mind retiring at
age 55, so we will take the press release at face value right now. We hate to
lose the former President of Glaxo and his operating expertise, but the heads
of global operations, business development, finance, etc. remain. We believe
the Company will survive and move on. We would suggest, but do not have
first-hand confirmation at this point, that the fact he will continue to serve
PPDI as a consultant means he is not leaving to join a competitor (PAREXEL, for
example, is currently conducting an active search for a senior executive.)
Of course we all have seen resignations, or retirements, at other companies,
followed coincidentally by earnings disappointments. This hypothetical
scenario, unfortunately, is plausible at present, due to recent misses at
Covance, PAREXEL, Kendle, and others. This is why investors are throwing in
the towel today, it's a "we can't take it any longer" attitude.
We may be too contrarian for our own good, but we think now is the time to
commit to the theme and the company. Investors are in a shell-shocked state
(the four industry leaders --- QTRN, CVD, PRXL, and PPDI are now down an
average 54% year-to-date) and are questioning trends we believe are reasonably
obvious. We see no evidence the outsourcing trend is dead; in an announcement
only distantly related but symbolic of our optimistic case, Snyder
Communications (SNC-NYSE) today announced a $70 million/year (our estimate)
multi-year outsourced sales contract with Bristol-Myers Squibb. (PPDI is not in
this business segment.) |
