Seeking Alpha
Profile| Send Message|
( followers)  

<< Part 1

The Financials

The Income Statement

Caraco’s (NYSEMKT:CPD) management has been conservative in making projections and has delivered beyond expectations.

In the 2006 annual report:

We believe that we will continue to achieve 25% to 30% revenue growth during Fiscal 2007 over Fiscal 2006.

  • Net Sales for 2006: 82M
  • Net Sales for 2007: 117M
  • Increase in Sales: 42%

In the press release for 2007 annual reports:

Based on current trends and future realizations, we believe we will achieve a 30% growth in sales for fiscal year 2008, compared to fiscal year 2007.

  • Net Sales for 2007: 117M
  • Net Sales for 2008: 350M
  • Increase in Sales: 200%

In the 2008 annual report:

Based on our own development pipeline and the current agreements we have with Sun Pharma along with other third party developers we believe we will achieve 25% growth in sales for Fiscal 2009, compared to Fiscal 2008.

  • Sales for first 6 months of 2008: 76M
  • Sales for first 6 months of 2009: 230M
  • Increase in Sales: 202%

The company’s sales growth has been accelerating and future product pipeline is extremely strong. Between Sun Pharma and Caraco, there are 95 ANDAs awaiting approval. Caraco currently has 23 ANDAs awaiting approval.

The Balance Sheet

Caraco’s balance sheet has been free of long-term debt since 2003. The company currently has 33M in cash. Caraco has mentioned that it plans to use its strong balance sheet to make acquisitions. Given the tightening of the credit markets, there will be opportunities for Caraco to acquire companies that are struggling due to the credit crisis.

The company’s net book value is 161M. So you are buying the company for less than book value.

The Cash Flow Statement

For the 12 months trailing, Caraco had 40M in net profit. The CapEx for the past 12 months has been 18M, but in the last 6 months it has been 8M and 6M per quarter. Caraco is currently in the process of doubling its manufacturing capacity. So the CapEx are not normally expected expenditures. The CapEx for FY08 was 5M, FY07 was 6M, FY06 was 3.6M. So a FCF for the past 12 months is 22M (40M – 18M).

The company expects the expansion development to be completed at end of 2008. I expect the CapEx to get back to normal in 2009, expecting around 1-1.5M per quarter. If we apply the normal expected CapEx to the past 12 month’s CF from Operations (Caraco has negligible depreciation/amortization), we get a FCF of 34M (40M – 6M).

Valuation

I believe that currently Caraco sells at an extreme discount compared to its peers and valuations used in recent mergers and acquisitions.

Looking at valuations you don't need to look much further than Caraco's parent Sun Pharma. Sun Pharma recently offered to buy Taro Pharma (TAROF.PK), a generic pharma company, for .9x sales. If you apply a similar multiple to Caraco, you get a $10/share valuation. Also, Taro Pharma has substantial debt and is a turn-around opportunity for Sun Pharma. Caraco is in a much healthier position and has one of the best operations in the generic pharma sector.

Caraco

Teva (NYSE:TEVA)

Perrigo (NYSE:PRGO)

Watson (WPI)

KV Pharma (KVA)

P/E Ratio

4

18.9

22.67

12.4

9.4

Price/Sales

.41

3.28

1.58

1.04

1.26

Price/CF (adjusted removes non-cash R&D expense)

6.6

(4.25 adjusted)

14.2

13.3

6.4

6.2

Caraco is attractive given the low P/E, Price/CF, and Price/Sales multiples. A Price/CF multiple of less than 6.6x for a company that is growing at 25%. The adjusted CF removes the non-cash R&D expense that the company had accounted for as part of the technology transfer agreement (Caraco transferred 544,000 shares to Sun Pharma for each ANDA that Sun Pharma transferred to Caraco). At adjusted Price/CF, you have the company selling at 40% discount to its peers.

In FY 08, the company had earnings of 35M. If you assume normalize CapEx of 5-6M, you get a company that is selling at 4.8x CF, and at 3.6x if you remove the cash. If you assume atleast an 8x of earnings, you are getting the company for half the price.

The generics industry is expected to grow in double-digits until 2011. The company has stated a 25% growth for current year. Let’s be conservative about the FY 2010 and 2011 growth rate and expect 15% growth. We assume that all sales increase have a 9% gross margin, and that 4% (of sales increase) hits the bottom line.

FY 2008

FY 2009

FY 2010

FY 2011

Sales

350

437M

503M

578M

Net Income

35M

39M

41M

44M

CapEx

5M

22M

10M

11M

FCF

30M

17M

31M

33M

Cash

33M

50M

81M

114M

Sales Growth

25%

15%

15%

Gross Margin on additional sales

4%

4%

4%

The above projections use a fairly conservative growth of 15%. The company has been growing sales over 28% for the past 3 years, so 15% is a very conservative projection. I use the 25% growth estimate for FY2009, although the company is currently on a pace to grow much faster. Also, given the favorable conditions for the generic industry, I think the company can easily grow around 15% in 2010 and beyond.

For a terminal value, I expect the company to make a net income of 44M and growing in double-digits, I use a 12x of 44M. That gives a value of 529M and with 114M in cash, the company should be worth 643M. At the current price of 145M, it seems the market is throwing a pitch right in the middle of the plate.

Conclusion

With a large number of products in pipeline, a strong backing from a large pharma, zero debt, and solid balance sheet, Caraco is a fast growing company with large potential trading at an extremely cheap price. Caraco has the tools and the backing to compete larger firms on a large scale.

At current earnings, you are getting a high double-digit growth company, with a strong backing from a large pharma company, with over 20% of market cap in cash, and no debt for about 3x of current earnings (adjusted for cash).

Further Reading:

Disclosure: Long CPD

Source: Caraco Pharmaceutical: Underappreciated and Undervalued, Part 2