The Motley Fool

There could be hidden value in these FTSE 250 stocks

Shares of FTSE 250 pharma firm Vectura (LSE: VEC) dived 14% to a new 52-week low of 94p in early trading this morning. This despite it releasing first-half results “in line with board expectations for the full year” and stressing its “multiple opportunities to create substantial shareholder value” for the remainder of the year and beyond.

Excellent progress

Vectura posted a 6.6% rise in H1 revenue, with recurring revenue increasing 26.1%. However, losses widened, although this was mainly due to amortisation of the intangible assets recognised on its  merger with Skyepharma last year. If we look back to that deal, we can get an idea of how much value may be hidden in the combined group.

On 15 March 2016, the day before the announcement of the all-share merger, Vectura’s shares closed at 146.6p, giving it a market capitalisation of £602m. Skyepharma’s market cap was £412m, making the aggregate of the two companies £1,014m. Today, the market is valuing the combined group at just £665m.

Vectura reported “excellent progress” with the merger integration in this morning’s results. It said it remains on track to deliver its original £10m target annual cost synergies by 2018 and has identified further synergies of £1m to £2m from 2018.

Over-reaction and under-appreciation

The reason behind Vectura’s current depressed valuation is downgraded analysts’ earnings forecasts. These were the result of an announcement in May of a delay in approval from the US Food and Drug Administration for a partner’s generic version of GlaxoSmithKline‘s asthma medication Advair Diskus. While Vectura and its partner are confident of receiving approval in due course, it no longer anticipates receiving an approval milestone payment or sales royalties this year.

I think the market is both over-reacting to the issue of the generic Advair approval and under-appreciating the strength of Vectura’s overall business and growth prospects, post-merger. The City’s downgraded underlying earnings-per-share (EPS) consensus for the current year of 3.5p gives a price-to-earnings (P/E) ratio of 28. This falls to below 20 next year on forecasts of 43% EPS growth to 5p. The price-to-earnings growth (PEG) ratio is less than 0.5, which is deeply on the value side of the PEG fair-value marker of one, and leads me to conclude that now could be a great time to buy a slice of this business.

Overcoming indigestion

Vectura’s partner on generic Advair is fellow FTSE 250 firm Hikma Pharmaceuticals (LSE: HIK). And, like Vectura, Hikma also completed a major acquisition last year.

The day before its announcement of a proposed cash-and-shares acquisition of two businesses of Boehringer Ingelheim, Hikma’s market cap was £4.15bn at a share price of 2,080p. The deal valued the acquired businesses at $2.65bn. Yet, today, Hikma’s market cap is just £2.84bn at a share price of 1,180p.

To be fair, the acquisition has caused Hikma some indigestion, falling short of initial expectations. Nevertheless, the medium-to-long-term outlook and the share price sell-off, lead me to rate the stock a ‘buy’. The City consensus EPS forecasts of near to 75p this year and 85p next year give P/Es of around 16 and 14 and a PEG near the fair-value marker of one. This isn’t unattractive, but I believe Hikma’s historical success with acquisitions means there’s every chance it will exceed the consensus EPS forecast for 2018 — even if my optimism doesn’t stretch quite as far as the 100p+ forecast by the most bullish analysts.

Could Vectura and Hikma help you make a million?

If you're looking to increase your return from the stock market, I can tell you that the experts at the Motley Fool have figured out a number of simple steps that could bring a seven-figure-sum stock portfolio within the reach of many ordinary investors. And they've published their findings in a FREE report called 10 Steps To Making A Million In The Market.

To enhance your wealth-making prospects, I urge you to read their straightforward step-by-step guide. There are no strings attached, so simply CLICK HERE for your free copy.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.