Transitioning to profitability

Horizon Discovery (LSE: HZD) is listed on London’s junior AIM market. At a share price of 173p, its market capitalisation is £260m.

It’s a global leader in the design, manufacture and application of gene editing and gene modulation technologies. Its products and services are used by researchers and drug developers, and it counts major pharmaceutical companies, including AstraZeneca, among its customers.

Horizon has been building scale and is currently loss-making. However, it’s appointed a commercially savvy chief executive to lead its transition to profitable growth. Annual results are due next Monday, and company guidance is for revenue of £58.7m, gross margin in excess of 67% (versus 62% in 2017), and year-end cash of not less than £25m.

There’ll still be a bottom-line loss at this stage, but I view a valuation of 4.4 times sales as attractive for a cashed-up company with strong growth prospects. Horizon’s management turned down a 181p a share takeover approach from Abcam last year, saying it “fundamentally undervalues” the business. I see the stock as a credible speculative buy.

Exponential revenue growth

Optibiotix (LSE: OPTI) is another AIM-listed company. At a share price of 81.5p, its market capitalisation is £70m.

It develops compounds that modify the human microbiome. These compounds help in the prevention and management of chronic lifestyle diseases, including obesity, high cholesterol and diabetes. It’s moved from research and development to inking an impressive 30-odd (and counting) commercial deals with food and pharmaceutical companies.

Ordinarily, I wouldn’t buy a stock trading at more than 10 times sales — required revenue of not less than £7m in Optibiotix’s case, versus actual revenue of just £541,000 in 2018. However, 85% of this was generated in the second half of the year, and we’re in the very early stages of its partners ramping up sales.

Due to the prospect of exponential revenue growth — much of which will drop straight to the bottom line under the company’s licensing business model — this is a rare instance where I’d be prepared to ignore my less than 10 times sales rule. As such, it’s another stock I see as a credible speculative buy.

Rising earnings

Vectura (LSE: VEC) is a constituent of the main market FTSE SmallCap index. At a share price of 72.5p, its market capitalisation is £482m.

It’s a leading designer of devices and developer of products that help patients suffering from airways diseases. It has growing global royalty streams from 20 products, and a portfolio of drugs in clinical development with multiple partners, including FTSE 100 group Hikma and Swiss giant Novartis.

Vectura posted a hefty loss on revenue of £160m last year. This was due to (non-cash) charges, including a £39.8m impairment after a disappointing result from one of its pipeline programmes. However, cash flow was strong, and even after investment of £12.3m and share buybacks of £13.8m, year-end cash increased to £108.2m from £103.7m at the start of the year.

The stock is trading at 15.4 times forecast 2019 earnings of 4.7p a share. And the multiple falls to 12.7 times next year’s forecast earnings, with City analysts having pencilled in 21% growth to 5.7p a share. The valuation looks attractive to me, and I’d be happy to buy the stock.

The post 3 under-the-radar healthcare stocks I think have great growth potential appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Abcam, AstraZeneca, and Hikma Pharmaceuticals. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I’ll come back shortly to why I’d be happy to buy this FTSE 100 stock today and hold it for the long term, but first I want to tell you about a smaller company in the healthcare sector. This firm’s share price is well over 50% below its high of last year but I believe it could be on the verge of a major recovery.

Regaining momentum

Vectura(LSE: VEC) is an industry-leading designer of medical devices that enhance the delivery and performance of inhaled products to help patients suffering from airways diseases. It also develops high-quality generic alternatives to branded therapies.

The company experienced a challenging 2017 and the decline in its share price saw it demoted from the mid-cap FTSE 250 index to the SmallCap index. However, having refocused its portfolio prioritisation and implemented initiatives to transform R&D productivity, the business has been regaining momentum recently.

Looking to next year’s earnings — a consensus forecast increase of over 40% to 4.8p a share, according to Reuters — I reckon there’s considerable upside potential for investors today at a share price of 72p (market cap £479m). I’d be happy to buy this stock for its recovery prospects.

Unlocking growth potential

Smith & Nephew, which last month was named by my colleague Kevin Godbold as his top stock to buy, is a bigger, more stable business than Vectura, with a market cap of £11.8bn at a current share price of 1,350p. For this reason, and because ageing populations and more active retirees provide long-term rising demand for many of its products, it is a stock I believe can thrive for decades to come.

Current chief executive Namal Nawana arrived in the summer with a track record of energising businesses to deliver better performance and greater value to shareholders. He’s confident he can do this at Smith & Nephew, with what he describes as the group’s “excellent product portfolio with numerous best-in-class medical technologies.”

We should get full details of his strategic plans early next year, but today’s update told us of one major change already being implemented, which is aimed at unlocking the firm’s growth potential. This is a new global commercial model, including a president responsible for each of the company’s three specialised global marketing franchises: Orthopaedics, Sports Medicine/ENT and Wound.

Discount to peers

The current share price represents 18.5 times this year’s forecast earnings of $0.94 a share (72.9p at current exchange rates) and 17.4 times next year’s pencilled in $1.00 (77.5p). The earnings rating and a modest 2% running yield on a $0.35 (27.1p) dividend put Smith & Nephew on a premium rating versus the FTSE 100 average.

However, I see the shares as a ‘buy’ because the company looks great value against its own sector peers. Indeed, in a research note this morning, analysts at Exane said the stock is trading at a 10-year high discount of 20% against US peer Stryker.

The post Why I’d buy this flying FTSE 100 stock today and hold it for decades appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Therefore, could now be the right time to sell the stock? And could this turnaround play be a better option for the long term?

Investment potential

While GlaxoSmithKline has endured a difficult period during the last five years, its future prospects appear to be relatively bright from an investment perspective. The healthcare industry continues to have significant advantages for investors. Notably, the world’s population is growing and ageing. This could mean that demand for a range of healthcare products increases, which could provide a tailwind for industry operators. Furthermore, with the healthcare sector being less positively correlated to the performance of the wider economy than most industries, it offers defensive characteristics.

As mentioned, the stock’s performance in the last year has been disappointing. However, this means that it now trades on what appears to be a very low valuation. Its price-to-earnings (P/E) ratio is just 12, which for a FTSE 100 healthcare stock is relatively low. An upward re-rating could easily be justified – especially because a rise in earnings of 8% is due to be reported for the 2017 financial year.

In addition, a 6% dividend yield continues to have appeal to a wide range of investors. Although dividend growth may not restart in 2018, shareholder payouts are expected to be covered 1.3 times by profit this year. Alongside earnings growth, this could mean that dividend growth may return over the medium term. This could provide an additional catalyst for the company’s investors.

Turnaround prospects

Also offering the potential for improved share price performance after a difficult year is fellow healthcare stock Vectura (LSE: VEC). The device and formulation business for inhaled airways products reported on Thursday that its revenue for 2017 is expected to be in line with previous expectations.

It continues to have the capacity to invest heavily in R&D, with expenditure for 2017 expected to be between £60m and £70m. A strong performance in the second half of the year led to a healthy closing cash balance of £104m, which suggests further investment in its future growth capabilities could be ahead.

With Vectura forecast to post a rise in its bottom line of 24% in the current year, it could deliver a successful turnaround following a fall in its share price of 15% in the last year. The company’s shares now trade on a price-to-earnings growth (PEG) ratio of just 1.5, which indicates that they may offer good value for money. As such, now could be the perfect time to buy them, although selling GlaxoSmithKline to do so does not appear to be a good idea given its low valuation, high dividend yield and improving outlook.

The post Should I swap GlaxoSmithKline plc for this turnaround stock? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens owns shares in GlaxoSmithKline and Vectura. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Excellent progress

Vectura posted a 6.6% rise in H1 revenue, with recurring revenue increasing 26.1%. However, losses widened, although this was mainly due to amortisation of the intangible assets recognised on its  merger with Skyepharma last year. If we look back to that deal, we can get an idea of how much value may be hidden in the combined group.

On 15 March 2016, the day before the announcement of the all-share merger, Vectura’s shares closed at 146.6p, giving it a market capitalisation of £602m. Skyepharma’s market cap was £412m, making the aggregate of the two companies £1,014m. Today, the market is valuing the combined group at just £665m.

Vectura reported “excellent progress” with the merger integration in this morning’s results. It said it remains on track to deliver its original £10m target annual cost synergies by 2018 and has identified further synergies of £1m to £2m from 2018.

Over-reaction and under-appreciation

The reason behind Vectura’s current depressed valuation is downgraded analysts’ earnings forecasts. These were the result of an announcement in May of a delay in approval from the US Food and Drug Administration for a partner’s generic version of GlaxoSmithKline‘s asthma medication Advair Diskus. While Vectura and its partner are confident of receiving approval in due course, it no longer anticipates receiving an approval milestone payment or sales royalties this year.

I think the market is both over-reacting to the issue of the generic Advair approval and under-appreciating the strength of Vectura’s overall business and growth prospects, post-merger. The City’s downgraded underlying earnings-per-share (EPS) consensus for the current year of 3.5p gives a price-to-earnings (P/E) ratio of 28. This falls to below 20 next year on forecasts of 43% EPS growth to 5p. The price-to-earnings growth (PEG) ratio is less than 0.5, which is deeply on the value side of the PEG fair-value marker of one, and leads me to conclude that now could be a great time to buy a slice of this business.

Overcoming indigestion

Vectura’s partner on generic Advair is fellow FTSE 250 firm Hikma Pharmaceuticals (LSE: HIK). And, like Vectura, Hikma also completed a major acquisition last year.

The day before its announcement of a proposed cash-and-shares acquisition of two businesses of Boehringer Ingelheim, Hikma’s market cap was £4.15bn at a share price of 2,080p. The deal valued the acquired businesses at $2.65bn. Yet, today, Hikma’s market cap is just £2.84bn at a share price of 1,180p.

To be fair, the acquisition has caused Hikma some indigestion, falling short of initial expectations. Nevertheless, the medium-to-long-term outlook and the share price sell-off, lead me to rate the stock a ‘buy’. The City consensus EPS forecasts of near to 75p this year and 85p next year give P/Es of around 16 and 14 and a PEG near the fair-value marker of one. This isn’t unattractive, but I believe Hikma’s historical success with acquisitions means there’s every chance it will exceed the consensus EPS forecast for 2018 — even if my optimism doesn’t stretch quite as far as the 100p+ forecast by the most bullish analysts.

The post There could be hidden value in these FTSE 250 stocks appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Impressive update

Reporting on Monday was service-led niche pharmaceutical developer, Quantum Pharma (LSE: QP). The company announced the disposal of Total Medication Management Services, which is a homecare dispensary and delivery business which trades as Biodose Services. The disposal is another significant step in the transition of the business as it seeks to focus on its core Specials and Niche Pharmaceuticals divisions. The initial cash consideration on disposal will be £1.75m, with a maximum additional contingent consideration of £0.2m.

The sale of the division improves Quantum Pharma’s EBITDA (earnings before interest, tax, depreciation and amortisation) margin by eliminating low-margin turnover. In addition, the company’s remaining divisions have traded ahead of expectations in the early months of the year. The company expects this to offset the majority of the disposed contribution from Biodose Services in the current year.

Looking ahead, Quantum Pharma is expected to report a rise in its bottom line of 31% in the next financial year. Even after today’s 3%+ rise in its share price, this leaves the business trading on a price-to-earnings growth (PEG) ratio of just 0.4. This suggests its capital growth potential is high, which means it may be worth buying for the long term.

Growth potential

Also offering a wide margin of safety at the present time is sector peer Vectura (LSE: VEC). The therapeutic products and drug delivery systems specialist has a strong track record of growth. For example, in the last three years it has been able to increase its bottom line at an annualised rate of around 70%. This shows that its strategy has been working well.

Its future growth rate is also highly impressive. The company is forecast to report a rise in its bottom line of 54% next year, which could help to improve investor sentiment after a share price decline of 25% in the last year. One consequence of a disappointing year for its share price is that Vectura now trades on a PEG ratio of 0.3. This indicates that it could offer significant capital growth potential, with a margin of safety present in case there are downgrades to its forecasts.

Clearly, Vectura is a small company which may offer relatively high risks. However, with a substantial discount to its intrinsic valuation it could prove to be a sound long-term buy for less risk-averse investors.

The post These growth stocks are trading at major discounts appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens owns shares of Vectura Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The business is expected to endure a 20% earnings slide in the year to September 2017. But I believe Hollywood Bowl’s leading position in this niche leisure sector (controlling around a quarter of the country’s bowling lanes) should deliver rewards for patient investors.

It announced in last week’s market update that it “has traded well through the first half of the financial year,” with revenues leaping 7.8% year-on-year, or 1.2% on a like-for-like basis. This was despite Easter falling in the second half of the current fiscal period, unlike last year.

Strike lucky

Hollywood Bowl’s perky half-time numbers underline the success of its site refreshment and expansion programme, moves designed to transform its centres into one-stop shops for amusement lovers.

The company advised that refurbishments at its recently-acquired Bowlplex centres “are continuing to trade ahead of our original expectations,” as are changes across the company’s other brands.

And Hollywood Bowl’s site expansion programme also offers plenty of earnings potential. The business expects to open three new sites in the current fiscal year in Derby, Southampton and Dagenham, and has six new centres in total in its pipeline up until 2020.

It is true that the economic implications of Brexit are likely to hang over the retail and leisure sectors for some time. But Hollywood Bowl’s position as one of the better value-for-money operators in the market should allow it to effectively hurdle these near-term troubles, while ongoing work to its estate should underpin splendid returns further out.

My enthusiasm is shared by the City, which expects Hollywood Bowl to recover from this year’s anticipated earnings drop with a 13% bounce in the next fiscal year.

And I reckon a P/E ratio of 15.2 times for 2017 is a decent level at which to hitch onto Hollywood Bowl’s exciting growth strategy.

Breathe easy

Like Hollywood Bowl, medicines creator Vectura (LSE: VEC) is also expected to suffer its share of earnings turbulence in the near term. In this case, a 4% decline is anticipated by City brokers.

But in my opinion, any bottom-line trouble should prove short-lived as the merger between itself and Skyepharma in 2016 creates a leader in the fast-growing respiratory care segment.

Not only are sales of Vectura’s Flutiform and Ultibro treatments steadily catching fire — sales of the former jumped 29% during March-December — but new products like a generic rival to Advair also provide plenty of earnings opportunity. And the huge wads of cash thrown up by Skyepharma’s operations should provide the key to Vectura opening the vast potential of its drugs pipeline.

The Square Mile certainly believes so and predicts that Vectura will rebound from this year’s predicted earnings dip with a 49% bottom-line surge in 2018. While expensive on paper, I reckon a P/E ratio of 21.4 times for the current period is warranted given the firm’s increasingly-rosy revenues outlook.

The post Forget short-term pain: 2 growth stocks for long-term gain! appeared first on The Twelfth Magpie.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.