Fast-growing pharmaceutical company Skyepharma (LSE: SKP) administered a dose of the right medicine this morning with its full-year results. Revenues are up 30% over the previous year, operating profit ballooned by 46%, and earnings-per-share before exceptional items rose 43%.
Commeting on the results Skyepharma’s chief executive , Peter Grant, said,
“2015 has been a year of further substantial progress both operationally and financially. Our proven expertise in developing innovative inhalation and oral products has given us a track record of growth that reinforces our optimism about the future.”
Over the past five years, Skyepharma’s shares have rocketed by around 1170%, which demonstrates just how lucrative small-cap investments can be when they click. That’s a much better performance on total returns than I can get from big-cap stalwarts such as Vodafone Group (LSE: VOD).
However, in its present form, the Skyepharma growth story could be about to reach the end of the line. The firm revealed today that it has reached agreement on the terms of a recommended merger with mid-cap pharmaceutical company Vectura Group. That will be a satisfactory outcome for long-standing Skyepharma shareholders, but new investors attracted by the growth story will be pinning their hopes on the fortunes of the enlarged group if the merger goes ahead.
Up with events
Although I think that Skyepharma has been a better investment opportunity than Vodafone in recent years, I would let the dust settle after the merger has taken place before investing in either Skyepharma or Vectura Group now.
Meanwhile, Vodafone’s valuation looks well up with events to me. City analysts following the firm expect earnings to grow 23% to march 2017 and by a further 28% to March 2018. The firm has invested a lot of capital to upgrade its networks and that seems to be paying off. However, at a share price of 220p, the firm’s forward price-to-earnings ratio sits at around 28 for 2017/18, a rating that seems to anticipate double-digit growth rates in earnings for years to come. I think such an outcome unlikely as Vodafone is not a small and nimble growth business like Skyepharma.
No solace in the dividend
Perhaps there’s reassurance in Vodafone’s dividend prospects. The firm expects to deliver a dividend yield of 5.3% in 2016/17 followed by 5.4% during 2017/18. That looks attractive but there is no full cover from earnings, just 0.5 times and 0.65 times respectively.
In February, Vittorio Colao, the firm’s chief executive, said, “We continue to face regulatory and competitive challenges in many markets, but we are confident that the business is well positioned for the growth opportunities ahead.”
Vodafone is trading well, but the company’s valuation leaves no margin for error. As such, I see risk to the downside for investors and continue to avoid the shares myself. If the forward growth numbers miss a beat for some reason in the future, it’s easy to imagine Vodafone suffering a downward valuation re-rating that could see the firm trading on a lower P/E ratio.
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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.