We started off with the list of 25 companies from the biotechnology & drugs industry that recently registered on at least one Reuters Select stock screen. Click here to download an Excel spreadsheet comparing these biotech companies.
Then, we focused on the companies that landed on at least one of the screens in the value category. This left us with a list of three names: Anika Therapeutics, Barr Pharmaceuticals, Inc. (BRL), and Endo Pharmaceuticals (ENDP).
To narrow down our list further, we focused on the companies that posted above-average share-price improvement over the last 13 weeks. This did little, as all three climbed more than the industry norm of 4.6 percent. Anika shares advanced about 28 percent, while Barr's stock climbed more than 11 percent, and Endo gained in excess of 19 percent.
Given the rallies, we then focused on the companies that the analysts seem to favor. This approach also faced some difficulties, as all three of these firms landed on the screen for Favored Value Plays, which is designed to find companies that are not only trading at reasonable valuations, but also are regarded highly by the analysts who follow them. But, Anika's presence on the Reuters Select stock screen in the sentiment category for Consensus Choices helped this developer of products for the lubrication and protection of soft tissue and joints pull away from the rest of the crowd. The Consensus Choices screen filters for companies that analysts currently seem to favor and that are trading at reasonable valuations.
Although there are similarities between the two screens, there are also differences, which reinforce Anika's standing as a biotech firm that analysts like, with an attractive price tag. The Favored Value Plays screen starts off by comparing valuations. It requires that a company's price to earnings [P/E] ratio, based on current price and trailing 12-month [TTM] earnings per share [EPS], must be less than the industry average. It also demands that the P/Sales ratio must be less than or equal to the industry norm. As indicated below, Anika is priced at a discount to the average of its peers in the biotechnology & drugs industry on the basis of many key metrics.
Learn about Valuation Ratios
The screen then shifts gears a little bit and takes into consideration valuation based on analyst expectations of future performance. Here, we look at the forward P/E - current price divided by analyst EPS estimates for this year and next. But we don't look at the P/E by itself; instead, we compare it with the consensus of analyst estimates for long-term EPS growth, which yields the PEG ratio. Value-oriented investors prefer lower PEG ratios, with the more-conservative types concentrating on companies with PEG ratios below 1.00. Realistically, though, PEG readings slightly above this threshold are still in the value territory. The Favored Value Plays screen focuses on companies with PEG ratios that are below 2.00. This is the same valuation constraint used in the Consensus Choices screen.
At present, the consensus estimate of two analysts surveyed by Reuters puts Anika's EPS this year at 44 cents, rising to 60 cents in 2007. Based on the current stock price of about $13.25, Anika's shares are priced at forward P/E ratios of roughly 31 and 23, respectively. If we divide these forward P/E figures by the 30 percent estimate provided by one analyst for a long-term EPS growth rate, we see that Anika has PEG ratios of approximately 1.03 and 0.75.
The Favored Value Plays screen then turns to analyst sentiment towards a stock. Using an index that slides from a score of 1.00 for a buy recommendation to 5.00 for a sell recommendation, we want companies with low scores. Further, we also want some indication that, if there is a change in analyst attitude towards a stock, it is because the analyst has become more favorable on the issue. Thus, the screen focuses on companies that currently have a score of 2.00 or lower, and it requires that the present reading must be less than or equal to where it stood four weeks ago. By comparison, the Consensus Choices screen starts off with a more-stringent requirement: A company's current score must be 1.75. It also seeks companies with a present score that is less than its reading four weeks ago.
Only one analyst provides such a recommendation to Reuters. At present, that analyst has a buy recommendation, yielding a score of 1.00. This is up from the hold rating with a score of 3.00 both one and two months ago, thus securing Anika's presence on both screens.
ANIK 1-yr Chart
At the time of publication, Erik Dellith did not directly own puts or calls or shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.
Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.