Cambrex Deep Dive

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Saul Analysis: (see KB#9939)
look for companies that are growing fast, have recurring income, insider ownership, some kind of moat, reasonable PE, etc, and hope to find most of these qualities in stocks I’m investing in. So…

Company Web Site:
http://www.cambrex.com/

Brief Overview:
About Cambrex
Cambrex Corporation is an innovative life sciences company that provides products, services and technologies to accelerate the development and commercialization of small molecule therapeutics. The Company offers Active Pharmaceutical Ingredients (“APIs”), advanced intermediates and enhanced drug delivery products for branded and generic pharmaceuticals. Development and manufacturing capabilities include enzymatic biotransformations, high potency APIs, high energy chemical synthesis, controlled substances and formulation of finished dosage form products.

Not only will they supply building blocks to you, they will do it all if you want…

To speed your products to market, our experienced team will optimize your program to deliver your project on time, within budget and meeting quality specifications. All Cambrex facilities possess the flexibility and resources to offer a full range of custom development services designed to meet your project needs.
Our extensive development and manufacturing capabilities allows us to take your project from concept to proof-of-principle, scale-up and commercial production. Our development and R&D facilities in US and Europe have the capacity to meet your clinical and on-going commercial needs

look for companies that are easy to follow (e.g. already a pick by MF)
Fail: Not a Stock Advisor pick. Doubtful it is RB or HG pick.
Don’t need to understand the technology/industry (just the growth financials)
This isn’t a tennis shoe company, but simply put it makes the components and processes that drug companies use to make their patented “soup”.

want a company with rapidly growing earnings

Our spreadsheet here: https://docs.google.com/spreadsheets/d/1H_v6WOjFi81rM3TH9ZHS…
Note sure if it is up to date, seems close…


Trailing Earnings Last Year	Trailing Earnings This Year
Q-8	Q-7	Q-6	Q-5	Q-4	Q-3	Q-2	Q-1
$0.37 	$0.07 	$0.12 	$0.64 	$0.28 	$0.90 	$0.26 	$0.63 
							
TTME Last Year	$1.20 					
TTME This Year	$2.07 					
YoY EPS 		73%					
TTM PE		26					
1YPEG		0.35					
							
							
Trailing Revenue Last Year (in $M)	Trailing Revenue This Year (in $M)
Q-8	Q-7	Q-6	Q-5	Q-4	Q-3	Q-2	Q-1
$63 	$78 	$104 	$67 	$82 	$128 	$78 	$107 
 	 	 	 				
TTM Rev ($M) Last Year	$312 				
TTM Rev ($M) This Year	$395 				
YoY Rev Growth	 	27%				
TTM PS	 	 	4.28				

Thank you spreadsheet elves!

Pass: Good 1YEG. Good Rev Growth, Good EPS growth

gurufocus gives it a growth rating of 8/10

IBD ChecklistRating
Composite Rating 97 Pass
EPS Rating 98 Pass
RS Rating 98 Pass
Group RS Rating B+ Pass
SMR Rating A Pass
Acc/Dis Rating B Pass

And IBD ranks it first in its group but its group is only ranked 61/197. ABMD is ranked #2 in the group.

FUNDAMENTAL PERFORMANCE FOR CBM
Current Earnings
EPS Due Date 02/04/2016
EPS Rating 98
EPS % Chg (Last Qtr) 43%
Last 3 Qtrs Avg EPS Growth 168%

Qtrs of EPS Acceleration 0

EPS Est % Chg (Current Qtr) 29%
Estimate Revisions
Last Quarter % Earnings Surprise 5.3%
Annual Earnings
3 Yr EPS Growth Rate 35%
Consecutive Yrs of Annual EPS Growth 4
EPS Est % Chg for Current Year 60%

look for recurring revenue (e.g. Razor blade model)
Pass: Cambrex supplies components and processes to help big drug companies manufacture their drugs more efficiently and safely. The more aspirin or Harvoni a drug company sells, the more razor blades they need.
look for substantial insider ownership
Fail or pass?: Insiders only own 0.8% according to FinViz but IBD says management owns 4.75%.

look for a company with rapidly growing revenue. (at least 25% per year)

Fail: this seem a little slow.
IBD says:
Sales, Margin, ROE
SMR Rating A (pass)
Sales % Chg (Last Qtr) 14% (fail)
3 Yr Sales Growth Rate 16% (fail)
Annual Pre-Tax Margin 12.0% (fail)
Annual ROE 18.3% (pass)
Debt/Equity Ratio 24% (pass)

Get the information yourself. (Not yahoo, etc)
Fail: I got it from IBD and Finviz and Gurufocus because I don’t have time at the moment. But some came from the spreadsheet and it is likely good.

look for a company that has a long way to grow long runway. One that ideally can grow almost forever
Pass or Neutral: the more drugs that are sold, the more it can run. It sells to generic and patented drug makes, so the expiration of a patent probably helps them a lot. With increasing mandated medical coverage, the use of drug may increase. On the other hand, better drugs like Harvoni cure people instead of just manage the problem forever. If Americans started living a healthy lifestyle the drug sales could decline, but we know that won’t happen, even worse the rest of the world is starting to live like use. Ka-ching.

Not too big to grow/double/triple (e.g Sketchers not Nike)

Pass: Cambrex has a market cap of $1.69B, a company like Gilead has sales of about $31.5B. They have room to grow supplying big boys like that.

want a company that does something special,

Neutral: It’s not an iPhone that will gather a cult following. It is not the dominant eCommerce site that will deliver packages by drones, but it does perform an important service that requires skill, consistency and customer confidence. Imagine if the FDA found out you were sourcing cheap ingredients from China after all the human and dog food issues they have had.

want management to be interested in making a profit.
Not sure.

don’t usually buy restaurant chains. They seem inherently limited
Pass: But you still need lots of heart and diabetes medicines after eating at some of those restaurants.

avoid mining and drilling and natural resources stocks, which tend to go in cycles from boom to bust
Pass: drugs are pretty non-cyclical.

Addition research ideas for evaluating a new company.

good cash levels?
The Gurufocus website (join free) shows debt has been steadily declining and cash has been steadily increasing and that cash/debt = 2.01. Finviz says $1.91/share
*need to check SEC filings.

Good Free Cash Flow?
Pass: see above.
//You’d also like to see Free Cash Flow as a percent of Revenue (Free Cash Flow Margin.) grow from year to year.

Operating Margins increasing? (Revenue growth faster than operating expenses growth)
?

Is share count increasing too fast? (Provide summary and link)
Pass:
https://ycharts.com/companies/CBM/shares_outstanding shows a rise from about 29.5M in 2011 to 31.5 now. Not too bad, 6.7% in 4 year. (nice graph)

Is P/FCF less than 30-ish? ( Price to Free Cash Flow ratio?)
Pass: P/FCF is 28.81 per Finviz and 29.47 per Gurufocus.
low debt levels?
Pass?: Long Term Debt/Equity and Debt/Equity are both a meager 0.10 (per FinViz) but IBD says: Debt/Equity Ratio = 24%

tidbits on competitors and risk: (see the 10K)
http://finance.yahoo.com/q/co?s=CBM+Competitors
Aceto Corporation, together with its subsidiaries, sources, markets, sells, and distributes pharmaceutical intermediates and active ingredients, finished dosage form generics, nutraceutical products, agricultural protection products, and specialty chemicals. (IBD gives it a composite rating of 92)
http://www.sigmaaldrich.com/united-states.html Market caps per Yahoo:
CBM is 1.69B
Aceto is 825M
Sigma-Aldrich 16.77B

Risks:
Sigma-Aldrich is a very large competitor.
Gilead is 24% of business, if they leave it is very bad news. If they continue to grow and like CBM then it is good news.
Not surprisingly the strong dollar has some impact on their earnings.
They could be found to be using unsanitary processes or “dirty” precursors, thus ruining their reputation. But they stress their commitment to high standards:
We are committed to operating our facilities with the highest standards of:
Regulatory compliance
Environmental, health and safety guidelines

Conf Call notes
From conf call

It is important to note that this expansion in Iowa includes a large shell that provides enough space future buildout of equal size. This shell will include the necessary infrastructure to allow us to add another approximately $40 million to $60 million of revenue capacity in a much shorter time compared to new construction. These investments are designed to ensure that we have large scale cGMP capacity in place to serve the positive market trends we are experiencing.

Building for the future.

Other useful links
http://www.nasdaq.com/symbol/cbm/call-transcripts
http://finviz.com/quote.ashx?t=CBM
They have some case studies on the website to promote their skills

http://www.cambrex.com/uploads/media/Cambrex_Ultra_High_Pote…
Cambrex was approached by a US-based biotechnology company to develop a process for producing a highly potent API, a DNA alkylator, used to treat an unmet oncology need. The biotechnology company had limited experience in the development and manufacture of high potency compounds and sought a reliable partner for the pre-clinical development and clinical trial material manufacture, which could possibly advance to commercial manufacture, if approved. Cambrex has been successfully developing and manufacturing pre-clinical to commercial scale quantities of high potency APIs (see chart) since 1998 and uses a data-driven Occupational Exposure Limit (OEL) assessment for compounds of unknown toxicity.

Guess what? They solved the problem.

Cambrex exceeded the customer’s expectations for safety, yield and product quality. Additionally, Cambrex was able to meet a very challenging production timeline that had very limited flexibility

http://www.cambrex.com/uploads/media/Safe_Outsourcing_of_Ene…
Safe Outsourcing of Energetic Chemistry
Bottom line: exothermic reaction can be dangerous, as in kaboom! We have the experience you don’t so outsource to us.

Warnings:
– just because the layout of this presentation might look pretty, doesn’t make it a good stock :wink:
– when I put so much time into something like this I become biased, so please toss some good criticism out there before I go buy a bunch.
– during the tech boom and nanotech boom and biotech boom I really learned a lot about certain companies and underlying technologies. I sounded really smart. I was so smart and confident that I was able to hold companies well past their peak.

28 Likes

If you are inspired, here is a Challenge

  1. someone could verify the noted spreadsheet is up to date (and tell us and/or update it)(be a spreadsheet elf)
  2. you could update Neil’s web page with data from the updated spreadsheet:
    http://www.1ypeg.com/CBM
  3. Read the last conf call transcript as it is my bedtime and I could not make it through.
  4. whatever useful data you can find.

Thanks

PH42 - interesting write-up on CBM.

On insiders, I noted 3.5% from CapIQ last time I looked.

My analysis is that CBM is not currently cheap but probably at about fair value, therefore an investment now relies on growth, not multiple expansion for a result. I am OK with that. I find so few companies which qualify, I am inclined to give those that do the b. of the d.

1 Like

I am wary on seeing a director, not an important one but a director, offload what looks like about 47%. He is probably taking a cautious view after this year’s amazing rise and ‘locking in’ some gains - who knows. But is enough to make me do the same and review later. I do not like crystallizing a tax liability, but even less riding 'em up and riding 'em down again. It’s farma, not phood.

Hi Puddinhead,

Thanks for all your hard work on the deep dive on Cambrex. It certainly looks interesting, and I’m looking at it further.

One caution though. By not checking yourself, you didn’t pick up the most recent quarter’s results. It turns out that there was nothing wrong with the most recent quarter, but you couldn’t know that, and would you really want to put your own money in a company (which you sound on the verge of doing), without knowing what happened in their most recent quarter??? (Compared to the time you put in compiling all this information, looking at the last press release would have taken no time at all).

Thanks again for suggesting this interesting company.

Saul

3 Likes

Last 3 Qtrs Avg EPS Growth 168%

Sorry PH, but I couldn’t help commenting on this. When you get ridiculous figures like this, you know you are dealing with nonsense GAAP numbers. Maybe they sold a building, or released their NOL’s, but that’s got to be GAAP.

Saul