Friday, September 12, 2008

The Last Place To Expect Value

Emergent BioSolutions Inc. (NYSE: EBS) does not have the makings of an ideal value stock. Being a small pharmaceutical company, value investors would tend to worry about the risks of being too reliant on only a few drugs. We discussed here how the diversity of large pharma companies can offer some certainty going forward, but a small company that relies on just one or two drugs, can one possibly find value there?

It is indeed possible. First of all, though we don't like the risk of relying on just a few drugs, in general we do find more value in small companies than in large, for the reasons discussed here. In the case of EBS, it traded for about $150 million in late 2007, yet its operating income is fairly stable, and has averaged almost $30 million for each of the last four years, with the last two years coming in over $38 and $33 million.

At the same time, the company was trading very near its book value, offering the potential for downside risk minimization. Of course, as demonstrated on this post regarding Amisco, you'll want to go through the book value items of the company and make sure there actually is value in that book value number.

Finally, the company has spent $150 million in R&D over the last four years! So like we saw with the large pharmas, there was an opportunity to buy the cash flows of this company at a decent price, and get all the R&D that has already been purchased (if you look at it from the point of view of an asset), for free!

However, that opportunity has come and gone. Here's a look at the stock's performance since late last year, as it has almost tripled in value:

This is an example how value can be found in some of the most surprising places!

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