LON:CLIN | Analyst Targets - When Should We Believe Them?

7th Aug '14 by TheWatchmaker

8 comments 11884 reads

Q: Are these numbers the same : 439, 511, 561, 650?
A: No, obviously not.
Q: Why should anyone care?
A: When they are the target prices for the same stock from different analysts.

I read today that N+1 Singer have initiated coverage of Clinigen (CLIN). This is a company that I have been monitoring closely for the past 18 months.

Of particular interest is the wide range of analyst valuations at present.
N+1 Singer 439p : Edison 511-561p : Investec 650p : Oriel Securities 650p
(There may be others that I am not aware of)
Share price is in the 370-380p range this week.
So, what should a private investor make of these wide ranging target figures - which analyst valuation should we believe?

To examine this I'll present a brief background of the share price and recent announcements.
Floated on AIM at the end of Q3 2012 at c180p CLIN enjoyed a steep rise throughout Q2-Q4 of 2013 to reach 620-690p in Feb2014. Growth prospects looked good.
The interim statement on 26-Feb-14 still showed growth that most companies would be envious of, but not at the levels hoped for by investors.
Share price dropped significantly that day and drifted down in stages over the following months until the year end statement on 24-Jul-14. They had dropped as low as 370p before a brief rally to 395p ahead of the statement.
The statement gave further mixed news, growth but not at the previously hoped for levels. It has slipped back to 370p again.

I believe 370p is a sensible value for now with potential to reach a valuation of 440p in 12 months time if current growth levels are maintained - based on a re-assessment following the year end trading update. This appears to match N+1 Singers figure but I haven't seen their analysis. It is possible we have reached the same answer via different paths.

So how do the other analysts get significantly higher valuations?
I believe it is quite simple - they are too lazy to do the work and update the figures on this small cap.
Edison say they haven't changed their view after the pre-close statement but will re-analyse when full year figures are out. It may be a reasonable approach but…

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AnonymousUser37607

8th Aug '14

Following equity research in this game is not a path to success - most are paid cheerleaders, many cannot add up, some don't even understand the companies they write about. Use them by all means as part of any overall research process and some analysts are insightful but if you really want to understand a company there is no shortcut to the independent research that you do yourself

Cuthbert C

I use analyst reports as interesting and helpful sources of information, insight and opinion but tend to treat their current valuations and targets as things separate from, indeed often unconnected with, the body of their analysis.

Many years ago I spent weeks on the analysis of an E&P company and in the process went through each of 7-8 analyst reports. I noticed that there was no correlation at all between the optimism/bullishness of their assumptions about exploration/production success and their view of current/target values. Indeed the analyst who expected the worst outcomes in terms of E&P operating events stated the most aggressive valuations, and the most optimistic analyst in terms of operations reported the most timid valuations/targets. It was strikingly obvious that each report was in fact 2 separate and distinct pieces of work . There was an effort at fact finding and analysis and a separate effort at determining current and future value. These were stitched together together in a way that was sometimes crude and which often left a visible join.

From then on I started to use the fact find and analysis as part of my own due diligence - but only as inputs, not as determinants. In doing so I took account of variations in diligence and intelligence of the authors. I continued to use the valuations and targets too, but as expressions of opinions which might be biased by self interest which was harder to measure.

None of this stops me from gaining benefit from analysts' work, but I treat it with scepticism.

TheWatchmaker

9th Aug '14

Thank you to Heisenberg and Tournesol for their wise words on this matter. I shall continue to take what I can from the reports of analysts. However, I will be more cautious in trusting the figures they produce.

On reading my post again after a couple of days have passed - I sounded somewhat bitter and annoyed - really I'm just frustrated with the misinformation being regurgitated by analysts. But I haven't lost out - Far from it. Being able to generate my own valuations has allowed me to get out immediately after a trading update and before prices have fallen. I just wish I could have seen them coming a bit sooner.

Unfortunately, I'm a one-trick-pony at present and only seem to be able to value some small-cap growth stocks with history of earnings. More study and experience required.

Heisenberg - your blog looks like an interesting place for me to learn a bit more about valuations - a useful resource - thank you for publicly sharing your knowledge and opinions.

20th Aug '14

Clinigen today announced the acquisition of another Oncology drug, Ethyol, from AstraZeneca. This is positive news as it demonstrates that Clinigen are continuing to deliver on their promise to expand their Specialty Pharmaceuticals range.

Ethyol is reported to have annual revenue of $4.9M (c. £3M). From this Clinigen will need to pay AZ for manufacture and a consideration for transfer of this drug to Clinigen. Specialty Pharmaceuticals have a high margin of 70%+. I'd expect around £1M of this revenue to drop to the bottom line for 2015 earnings for Clinigen.
In the scheme of things, this is a welcome addition but is not such a significant increase.

I'd raise my now price to 400p and 12 month price to 475p.
The market clearly disagrees with me on the significance of todays news, share price has reacted very positively raising to c.447p today.

If Clinigen can grow the market for Ethyol then it will make a bigger impact to their future results. But recent Specialty acquisitions have been slow to deliver. Until there is evidence of organic growth in this area I don't see it sustaining higher ratings.

I confess that I am puzzled : the scale of the share price reaction today seems at odds with the potential increase in earnings from this acquisition.

24th Sep '14

Preliminary results out this morning. No reason to move my targets much, c. 410p now and 475p next year. Market has continued to remain elevated with next years gains already priced in.
Will be interesting to see what the analysts report when they have digested the latest figures.

Ramridge

Far from being frustrated at the lack of consistency by the analysts, I actually welcome it. It presents great opportunities.
If you have done your analysis of quantitative and qualitative data for a particular share and arrived at a fair price, then you should back your judgement and game the analysts and the market.

15th Jan '15

Trading update out this morning for H1 2015 from Clinigen.
Still seeing positive growth in revenue up 17%. Clinical Trials income is recovering some ground from last years stall, GAP margins reported to be climbing back up toward 40% after last years' slump. Unfortunately, there is very limited information on the high margin Specialty Pharmaceuticals - 5% Foscavir growth but no real info on the others (Cardioxane, Vibative, Savene, Ethyol). If there was material growth then they'd be saying so - my inference is that there is nothing to crow about here.
As previously stated, until the new Specialty drugs gain sales momentum the growth in profits will remain at a similar level and this is already priced into the share price.
My targets are 425p now and 475p at FY2015 results. No real change. With the share price at 505p at close 14-Jan and 496p close today, I feel that further SP falls are possible and no justification for higher prices in the near term.

Numis have today re-iterated their target of 500p and a BUY rating. Their target is not far adrift from my own. Given that the SP is already at 500p I'd feel a HOLD is the best you could say for a 500p target. I did chuckle at this.

If new Specialty Pharmaceuticals sales growth kicks in properly over the next 18 months then a return to SP 600p could be warranted by mid-year 2016 - too far away for me at present so I will continue to wait and watch.

jpsc01

16th Jan '15

Just on the subject of Analysts and their reports. The key question in every instance is why are they writing the report. By and large they are doing it at the behest of their firm and usually there are only four reasons that they want a report;

1 - Coverage of an existing client. Often required as part of the service to the client. Client fees matter - analyst will be strongly encouraged to be as positive as possible. May even be helped in producing the report by senior members of the team working with the client.
2 - Coverage of someone the firm wants to win as a new client. Again it is going to be positive and people senior to the analyst are likely to want to see it before it is released.
3 - Coverage to enable proprietary or client trading. You are not going to get a copy of this unless you pay.
4 - Coverage initiated to show expertise in an area. Perhaps when the firm has a new joiner who knows about someone they have not usually covered. Possibly the most accurate depending on whether the coverage falls into 2 or 3 above.

Above all remember firms do not employ analysts for your benefit they employ them for theirs. As such they are sales tools or trading tools. That is not to say that there is not good, often very good information in these reports. But if you have not commissioned it and are not paying for it, it is not being written for your benefit.

Analyst Targets - When should we believe them?

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TheWatchmaker

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