These two beaten-up FTSE 250 stocks are due for a comeback but today’s results are not acting as a launchpad, with both suffering a patchy response. Has the market missed a long-term buying opportunity here?
Hikma Pharmaceuticals (LSE: HIK) fell more than 6% this morning after its trading statement cut forecasts for its generics business for the third time this year, blaming challenging US market conditions. The group now expects around $600m revenue from the business for the year, with core operating margin in the low-single-digits. It expects the challenging market conditions to continue next year and is actively pursuing new commercial opportunities and turning to its pipeline to offset continuing price erosion, as well as looking to identify further cost savings.
Hikma also gave an update on its generic version of GlaxoSmithKline’s asthma treatment, Advair, following “constructive discussions” with the the US Food and Drug Administration, which clarified most issues aside from one, where it disagrees with the FDA’s position and is progressing with a dispute resolution process. We will know more in the first quarter of 2018. Hikma and partner Vectura “remain confident in the approvability of our product” and are looking to bring it to market as soon as possible.
Bought the pharm
I am always on the lookout for stocks that have taken a beating on publication of results, because many sellers take a short-term view while the Fool prefers to recommend stocks for the long term. Broker Numis reckons the morning sell-off was overdone and has upgraded the stock to ‘buy’, heralding Hikma’s diverse growth potential and long-term prospects through organic growth and M&A.
I echo that but the road ahead will be bumpy, with earnings per share (EPS) forecast to fall 21% this year. However, City analysts reckon 2018 will deliver 10% EPS growth and today’s valuation of 14.9 times earnings is hardly overstretched. Hikma’s forecast yield of 2.1% covered 3.1% times also helps. However, you may prefer this other drug developer, which recently spiked 20% in a day.
In July I wrote that Dairy Crest Group (LSE: DCG) is a forgotten stock with serious growth potential and today’s interim results showed a 16% rise in first-half revenue to £220.1m with adjusted profit before tax at 8% to £20.6m.
CEO Mark Allen hailed “an encouraging first half”, with brands Cathedral City, Clover and Frylight delivering good volumes and value growth. Cathedral City saw “exceptional growth” of 10% over the period. The good profit growth was despite a record high cream price, which has driven up input costs in the group’s butter and spreads business.
Crest of a slump
The wholesale cream price has risen by 65% over the last year to hit record highs of nearly £3 per litre, although there are signs this is now reversing. In July I wrote that this £787m business still has plenty to offer investors despite negligible share price growth over the past two years. It is up 4.5% since.
City analysts are forecasting 4% EPS growth this year and 6% next, aided by plans to sell infant milk formula into the Chinese market. The stock currently has a forecast yield of 3.7%, covered 1.8 times. Trading at 16.6 times earnings, it isn’t cheap, but it isn’t expensive either. Worth investigating.
However, if you are looking for a stock to make you brilliantly rich, I wouldn't start here.
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Harvey Jones 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.