4 Noteworthy Upgrades on Monday
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Stocks get upgraded every day, but some are more impactful and meaningful than others, which is why I’m looking at those that may have the most meaning. These are upgrades where analysts provide reason for their call, and base their opinions on fundamental factors, rather than simply providing a price target with no note. Thus, let’s look at these four calls!
A High-Flyer With More Upside Coming
Santarus (NASDAQ: SNTS) saw gains of almost 7% on Monday, following Stifel Nicolaus’ price target hike from $22 to $24. According to Stifel, physicians are “very satisfied” with the company’s new drug Uceris, with gastroenterologists prescribing the drug for several off-label indications; according to channel checks and surveys.
During the company’s last quarter, total scripts written increased 44% year-over-year for its five marketed drugs. While this is great, it was Uceris that really shocked everyone.
Uceris is used to treat a form of ulcerative colitis – it launched last quarter – and analysts had originally expected just $3 million in first quarter sales; peak sales around $250 million. However, the drug actually produced $6.6 million and the company estimated that sales could reach $300 million.
Now, with off-label use, the upside for this drug might be even higher. When you combine this fact with the $700 million in peak sales from its other approved drugs, and its pipeline, then it seems logical that Santarus still has a great deal of upside potential!
Company Transformation Leads to “Buy” From “Sell”
Goldman Sachs has had a major change of heart, upgrading Cytec Industries (NYSE: CYT) from “Sell” to “Buy” and upping its price target from $68 to $93. So, why the sudden change of heart? Goldman believes that in light of Boeing’s battery problems, Cytec’s aerospace division is undervalued and has room to run higher.
Cytec reported revenue of $1.8 billion over the last 12 months, but aerospace was a fairly small piece. The company significantly strengthened its aerospace division last year with the acquisition of Umeco, which produces composite and process materials primarily for the aerospace and defense segment.
Goldman’s call appears right on, as although Cytec does not build planes, it does benefit from the construction and development of aircrafts. Over the last couple years, the company has undergone a massive restructuring, increasing presence in aerospace and decreasing its presence in chemical and coating.
Thus, Goldman, like many investors, weren’t sure how to asses or value the company. But now, with many of its pieces beginning to fit together, a clearer vision is being seen, and that vision suggest a “Buy” worthy stock.
Are Fears Overdone?
Citigroup upgraded TD Ameritrade (NYSE: AMTD) to “Buy” with a price target of $29 from $25. The firm believes that the interest rate scare was overdone and that higher rates will boost the company’s bottom line; creating an earnings surprise!
TD Ameritrade has rallied 55% in 2013. The reasons are quite simple: As the markets trade higher there is a belief that more trading activity will lead to higher revenue. However, there has been a dull spot, as many feared that interest rates would fall, which would cut into the company’s revenue for many of its interest rate dependent services.
Citi says this isn’t a worry. Personally, at 5.3 times sales with just 1% top-line growth, I fall into the category of those who are beginning to worry.
More Room For This Engine To Grow?
Priceline.com (NASDAQ: PCLN) is like the “big” engine that could. It’s the $45 billion stock that has rallied 730% over the last five years (almost 4% on Monday), which people keep thinking has reached its peak. However, Morgan Stanley believes there is yet more upside, upgrading it from “Neutral” to “Overweight”.
Morgan Stanley cites a number of catalysts that could impact earnings to the upside. For one, if the global economy continues to improve, the travel industry will also improve. With Priceline.com being the largest online travel company, it could see the largest growth. Moreover, lower costs and more efficient service management could ease margin pressure, according to Morgan Stanley.
Morgan Stanley is essentially guiding for higher revenue and higher margins, thus boosting profits. Much like TD Ameritrade, I think Priceline is a bit too pricey. Sure, Morgan Stanley might be right, and makes a good case, but with operating margins of 35% and over $5.5 billion in revenue during the last 12 months, I don’t see where the big upside is created. Especially considering that Priceline trades at 7.75 times sales, compared to Expedia’s 2 times sales.
Each of these firms gave valid reasons for their call, but Santarus is the only that I believe is fundamentally and logically validated. In Taking Charge With Value Investing (McGraw-Hill, 2013), I explain that while you may want to jump on the analyst bandwagon, you have to use common sense and look for reasons “why” a call is correct.
With Santarus, we know that sales of Uceris were above the consensus during its launch, and have channel checks to indicate its future success. Thus, it is logical to conclude that future sales should be above the consensus. In fact, if I disagree with anything about the Santarus call, it is the price target, I think its sales and pipeline warrant a much higher target.
Brian Nichols is long SNTS. The Motley Fool recommends Priceline.com and TD Ameritrade. The Motley Fool owns shares of Priceline.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!