Today United-Guardian (NASDAQ:UG) reported disappointing Q2 earnings, sending the stock sharply lower in early trading. Compared with the same periods last year, net income decreased by 32.8% for the quarter and by 23.1% for the six months. UG lost the biggest chunk of sales due to a marketing partner that had taken in a disproportionate amount of inventory in the first quarter of this year and ordered less product during the second quarter. However, UG has received indications from this partner that by year end sales for 2014 will be up over last year.
While this explanation might calm some nerves, a few other issues that came together in the quarter probably start to worry investors. As I had highlighted in my December 2013 article on the company, one of its most important products, Renacidin, was off the market for 15 months due to manufacturing problems. I said that it would be interesting to see whether the company could get back to the sales levels experienced before the manufacturing problems. Now Renacidin is available again and the company admits that sales of this product were lower than expected. In addition, UG also indicates another customer lost that accounted for 3.1% of its sales. So investors probably start to consider UG's moat to be not as strong as before.
I still believe that UG is and will remain an exceptionally strong and profitable business, but given the uncertainties around its sales growth highlighted by recent issues, I would currently apply a more cautious multiple to its earnings. As I stated in my article:
I would see fair value at about 22 times earnings - or even 25 times earnings, if the company will be able to gain back the sales lost from the Renacidin manufacturing problems.
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