COMPANY SPOTLIGHT: eResearchTechnology (Nasdaq:ERES)Expediting Clinical Trials
The Good: Strong backlog. The Bad: Erratic earnings pattern, high valuation. The Beautiful: Prices and demand increasing, high barriers to entry.
December 31, 2007 - eResearchTechnology (ERES-NASDAQ) offers support services and software to help streamline the clinical trials process that drugs and medical devices must pass to earn regulatory approval. eRT's products automate all aspects of the process, from setup and data gathering to analysis and FDA application preparation. Customers include drugmakers, medical device firms, and contract research organizations (CROs). Flagship product EXPeRT processes and interprets electrocardiogram data collected during the trials, to insure cardiac safety. eRT's eResearch Network connects CROs with doctors and patients participating in trials. The firm operates in the US and the UK.
The stock flew from 2001 to 2004 when it went from 60 cents a share to $29.80 (prices adjusted for 3 stock splits). But then earnings slipped, going from 54 cents a share in 2004 to 29 cents a share in 2005, then 16 cents in 2006. The stock followed, going from its high to $5.90 by 2006. Now earnings are recovering with an expected 28 cents a share this year and 40 cents next year. Guess what? The stock price is heading higher, too.
Backlog is up 23% in the last quarter when compared to the same quarter a year ago. Furthermore, those orders should convert faster into revenues since analysts believe delays in trial starts will be fewer than in the past. The last quarter also saw new bookings increase by 40%. Further icing on the cake was the average price of ECG trials was over $1 million, well above the $630,000 average price for the second half of 2006 and first quarter of this year.
Other numbers: Net profit margin was 9.8% in 2006 with expectations of a jump to 14.8% this year and 18.3% next year. There's almost $71 million in the till with current assets over 4 times current liabilities. There is a very smalll amount of long term debt, less than 1% of the capital structure. Officers and directors own 8.9% of the stock. This is a small cap issue with a $600 million market cap and 50.6 million shares. There is no dividend. Sales are forecast to increase annually by 12.5% on average for the next 5 years while earnings should grow at the same rate. Revenues were $86.4 million last year, expected to be $98 million this year and $115 million next year. NASDAQ: ERES | $11.95 | P/E: 42 | ROE: 9.6% | YIELD: 0 | PSR: 4.0 | D/E: .06 |
All the news seems pretty good. And investors believe it with the stock carrying a high P/E of 30 based on next year's earnings. Using this year's, it's above 40. There's also more competition knocking on the door, but the barriers to entry are high as eResearch has strong partenerships with pharmaceutical and biotechnology firms. Analysts are predicting higher cash flow next year, giving the company plenty of latitude for more research and development, another acquisition such as the just completed purchase of Covance's centralized ECG unit or a dividend or share buyback.
Check out eResearchTechnology if you're looking for a healthcare service company. It's small and very volatile. Earnings have been erratic but are growing again. Orders are strong and so are the partnerships with customers. It's a stock that can make your heart sing if it delivers or smash it if it doesn't.
- Company Web site: www.ert.com
- Ted Allrich
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