Risky & expensive
Shares in Neil Woodford-backed Circassia Pharmaceuticals (LSE: CIR) fell by almost 60% in one day this week, after the firm said its cat allergy treatment had failed a key trial.
In the firm’s latest study, its cat allergy immunotherapy treatment was found to reduce allergy symptoms by almost 60%. The problem is that patients who received a placebo instead saw an almost identical reduction in their symptoms. In my view, this suggests that many patients’ allergies are psychosomatic, rather than physical. The potential market for this product could be limited.
You may not agree with my conclusions, but what is clear is that Circassia shares were priced for a big success. Circassia’s market cap — after this week’s 60% drop — is still £300m. Although the firm currently has net cash of £136m, this is down from £203m at the end of last year.
Circassia appears to be burning through cash quite quickly. The firm is expected to report a loss of £68m this year. As cash continues to fall, I expect the share price to follow.
In my opinion, Circassia is both risky and expensive. I wouldn’t bet on a rebound.
Customer loss will hit results
As I write, today’s biggest faller is small cap electronics firm Stadium Group (LSE: SDM), which is down 27%.
The firm’s shares fell sharply when markets opened this morning, after Stadium said that its wireless division had lost a major customer. Stadium also said that sales in the group’s electronic manufacturing services division were falling faster than expected. This part of the business is being wound down as Stadium shifts its focus to design work.
As a result of the customer loss, Stadium now expects its full-year results to be below market expectations.
Broker forecasts were suggesting that Stadium would report earnings of 10.9p per share this year. I suspect these forecasts will be cut by at least 10% after today, suggesting a figure of about 9.8p. With the shares now trading at 78p, I estimate Stadium has a 2016 forecast P/E of 8.
Debt levels are low and if last year’s 2.7p dividend is maintained, Stadium could offer a dividend yield of 3.5%. There’s definite turnaround potential here, but I’d be cautious about investing until Stadium shows stronger signs of growth.
Quality, but too pricey?
Photo booth operator Photo-Me International (LSE: PHTM) slumped on Tuesday after the firm said that the timing of the next stage of a major ID card project in Japan was uncertain.
This overshadowed a record set of results for the firm, which reported record pre-tax profits of £40.1m and a 20% dividend increase to 5.86p per share. Photo-Me also announced a special dividend of 2.815p per share, which will be paid out of the group’s £62m net cash balance.
My view is that Photo-Me is a quality business, despite this week’s falls. The firm maintained its 21.5% operating margin last year and offers an ordinary dividend yield of 4.3%. My only reservation is that the outlook for earnings growth looks a bit uncertain.
On that basis, the stock looks quite fully valued, with a forecast P/E of about 16. I think there’s probably better value elsewhere.
