Novice Investing - King Flexes Its Muscle

Date: Tuesday 13th 2008f May 2008 05:11:28 PM

King Flexes Its Muscle - 01/08/2008

By: Hari Wibowo

King Phamaceuticals Inc. (KG), which had been plagued with patent expiration and attack from generic entry, had reason to smile lately. One of its lingering patent dispute was lifted on Tuesday January 7th when Core Pharma ended the suit for King's muscle relaxant drug, Skelaxin. Back in October 2007, we made an extensive revenue breakdown for King Pharmaceutical. We estimated that Skelaxin revenue will fall to $ 332 Million in 2009, or 20% drop from 2006 level. With this announcement, we would revise Skelaxin revenue to steady at $ 415.2 Million or an increase of $ 83 Million in revenue. Using the same margin assumption this will result in an additional net profit of $ 42.09 Million or $ 0.17 per share.

Therefore, fair value of King Pharmaceuticals would need to be readjusted accordingly. Seeing that King is more likely to stabilize its earnings and recent drop in interest rate, we feel that fair Price Earning ratio (P/E ratio) for King is 15, up from 14 previously. P/E ratio of 15 still implies a 6.66% yield, compares with 3.81% of 10 year treasury yield currently. Thus, with the federal reserve expected to lower interest rate to between 3.0-3.5%, we feel that fair P/E value of 15 is reasonable. Currently, fed fund rate is at 4.25%. As a result of Skelaxin ruling, now our normalized net earning for King Pharmaceuticals is $ 0.82 + $ 0.17 = $ 0.99. With $ 2.49 per share of net cash, King fair value is therefore:

Real price = stock price - (cash+ short-term investment)+ long-term debt.
Stock price = 15 x $ 0.99 + $ 2.49 - $ 0 = $ 17.34/share.

King pharmaceuticals has since risen sharply to $ 12.08 per share, which represents a potential 43.5% appreciation to fair value of $ 17.34 per share. While it is less than our 50% potential appreciation criteria for our sample portfolio, we feel that we should make an exception this time. Threat of recession as well as lowered interest rate in the future, will make a drug company like King Pharmaceuticals to do well. Shares may rise more than its fair value as a result. Therefore, we are pleased to welcome King Pharmaceuticals as a member of our stock portfolio with a purchase price of $ 12.08 per share today.

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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 King Pharmaceuticals Inc. (KG) or any other securities.

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