Novice Investing - King Pharmaceuticals

Date: Tuesday 13th 2008f May 2008 07:07:00 AM

King of the Hill - 08/23/2005

By: Novice Investing Staff

We haven't looked at King Pharmaceuticals (ticker: KG) in a while. We talked about it a while back when the share price was still at $ 9.00 in the back in June 2005. Back then, we thought that if King can just nail the $ 0.90 of 2005 expected EPS, its share price will rise to $ 12. Look at it now. How time has changed. Analyst now expect King Pharmaceuticals to earn $ 1.35 in 2005 while King's stock has risen to $ 14.50 a share now. Wow ! A 50 % appreciation in 3 months is not shabby.

We haven't done any serious calculation on King Pharmaceuticals recently. As far as we remembered it, King has roughly equal amount cash with long term debt. Therefore, the real price you are paying is the price of the stock itself. If investors want a 7.5 % yield on King Pharmaceuticals, then the fair Price Earning (P/E) ratio for King is 13.3. This means that if the analysts are correct in their EPS assumption, King is poised to rise to $ 17.95 per share, a 23% rise from here. Of course, most analysts are wrong. So, we wouldn't bet on that. But King is definitely worth watching.

What else should you be watching for? Sharper Image (ticker: SHRP). As a turnaround investor, we need to predict when things are going to change. Of course, the strategy is risky (like our investment in Merck) but the reward is huge. Right now, SHRP is expected to lose 13 cents for year 2005. Again, this is just estimate, which may not be accurate. SHRP has around $ 4 per share of net cash which provides cushion during downturn like what it currently is in. We are watching closely and is doing EPS calculation analysis on when SHRP will be able to turn a profit. When it does, share price will definitely rise reflecting the change in fundamentals. As for now, the stock is a good watch list.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Merck Co & Inc.(MRK), King Pharmaceuticals (KG), Sharper Image (SHRP) or other securities.

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