In November of last year, I wrote about the prospects for shares of Albany Molecular (AMRI) given that the stock was down 50% year to date and the company initiated actions to turn its operations around. Nearly seven months later, the stock is flat vs. a 5% rise in the S&P 500 (SPY). Sine then, however, there has been a host of good news that should, eventually, provide catalyst for the stock to move higher.
The company reported earnings on May 9. In fact, it's the first time since the first quarter of 2010 that investors actually saw earnings in the quarterly report. This was largely due to the company's efforts to right size its capacity in the face of the realization that management can't be sure when the industry will start to turn around strongly enough to justify the excess capacity. Additionally, the company stopped its active research on proprietary compounds after being criticized as to the value of the spending by investors. This move alone saves the company $10 million per year. The company is also in the process of bringing clients back into the Burlington plant that has been a drag on AMRI's contract margin since it was purchased in the second quarter of 2010. As you can see in the chart below, AMRI's contract margin is the highest it has been in nearly two years and the company is forecasting higher margins as the year progresses. If the company achieves the high end of its sales guidance it would be growing sales at 10% for the year. The contracts that the company inked with the National Institute of Health and Eli Lilly (LLY) in the second half of last year, in combination with the Burlington factory coming back online, gives us confidence the company will be able to hit its sales guidance.
Albany Molecular Gross Margin History
Although the company has stopped internal development of proprietary compounds, AMRI continues to collect royalties from its patents related to Allegra through at least 2014. In April of this year, it was announced that AMRI sold an option for Bessor Pharma to investigate a phase 1 compound the company previously had under development. Bessor paid an undisclosed amount to conduct its due diligence and attempt to raise the necessary funds to develop the compound. If it exercises the option, Albany Molecular stands to earn payments as well as royalties if the compound were to be commercialized. The company has a handful of other compounds that it could license out. In addition, it is partner to a long-standing agreement with Bristol-Myers Squibb (BMY) for three compounds in which the company stands to earn royalties if commercialized.
Since November of last year, the company has issued six separate press releases announcing several hires within the different divisions in an effort to start driving sustainable growth. Also, from November of last year through February of this year, five executives have made purchases totaling 96,000 shares. Though not an enormous amount of money, the purchases, including the CEO's purchase (who already owns 15% of the company) are a vote of confidence by management that performance is improving.
Given all of these seemingly positive data points, the average investor might be perplexed to see, upon looking at the story, that the stock has gone nowhere. This is likely due to perennial disappointment on the part of shareholders. As can be seen in the chart below, the stock has been on a continual decline since September of 2008, falling approximately 85% during that period of time.
While as of today the stock has not moved over the past 9 months, shares did rally to $3.44 in April before falling back to $2.59. The chart below shows that $3.50 has proven to be a resistance on three separate occasions.
If the company is able to maintain momentum in its sales and margin improvements, the stock likely has a long way to recover from its current price. Using a similar table to my prior article, the company's tangible book value should provide some price support.
Tangible Book Value Per Share
Change From Current Share Price of $2.59
Current Tangible Book Value
50% Write Down on PP&E
75% Write Down on PP&E
100% Write Down on PP&E
Additionally, EV/Contract Sales is currently a meager .35x. If one of AMRI's competitors sees its book of business as attractive and makes a bid for the company, this multiple would likely have to double to get a transaction done. Finally, the company's estimated year-end cash of $20 million, in combination with estimated (Noble Equity estimate) net Allegra royalties of $66 million in 2013 and 2014, implies that the company will have more than $80 million in cash by the end of 2014, compared with a current market capitalization of $78 million.
In conclusion, while this has been a disappointing story for most over the past several years, it looks as though management has taken the right steps to grow the business profitably, which should lead to a higher stock price.
Disclosure: I am long AMRI.