Wednesday, February 07, 2007

Kendle International (NASDAQ:KNDL) - possible bounce play

Couple of interesting comments on Kendle International (NASDAQ:KNDL) that issued 2006 and 2007 guidance late last night. It's a clinical research oganization (CRO) that provides services to the pharma and biotech industr. Peers include CVD, PRXL, ICLR and even PPDI.

- Jefferies notes the obvious negative here is that management's credibility may be tainted by this surprise guidance revision. The co had reaffirmed firm'sunderstanding of the guidance and management expectations as recently as a few weeks ago. For 4Q06, management is lowering revenue by a few million dollars, but basically cutting EPS in half (down $0.27 at midpoint). The reduced guidance is a result of "delays associated with anticipated signings of changes in scope." In their conversation with management offline, the firm was told that 2 large contracts had experienced delays, but were back on track. The negative leverage to EPS is certainly remarkable.

For 4Q06, KNDL reported a net book to bill of about 1.73, well above our estimate of 1.33. Net bookings were strong, coming in at $150MM - this is well above our $120MM estimate (the cancellation rate was about half of our high-teen estimate). On the call with management, we were told that business is strong and that the CRL CS unit continues to ramp nicely. We believe that investors may be skeptical of management's projections.

New business and backlog was above firm's estimate, and guidance for 2007 is actually OK, however they believe the multiple will compress. Expects a 12-15% KNDL sell-off in KNDL.

- Baird is much more positive saying that while 2006 ended on a disappointing note, and Kendle shares will likely lose a sizable portion of the recent move, and heighten CRO investors' overall consternation about the sector and about Kendle. There is nothing in Kendle's news that contradicts firm's bullish investment thesis on the sector, but this may not be immediately apparent to many observers. Kendle's 2007 outlook is better than expected and they continue to apply lower valuation inputs to Kendle than they would typically ascribe to a company with similar growth, margin and bookings metrics, given the inconsistent performance of the recent past and the Higher Risk rating that the firm ascribes to Kendle. Since 2006 is water under the bridge, and since their forward estimates are increased, and since their NTM- based valuation model now rolls forward to CY07, firm's price target for the next twelve months increases to $43 from $40. Baird thinks that their valuation inputs are fair to conservative, updated model realistic to conservative, and they expect Kendle to outperform the market over the coming year, though they would wait for a pullback to put fresh money to work. Firm is aggressive buyers below $33.

Notablecalls: Take a look at TZIX yesterday. They guided Q1 down but had a nice upswing in backlog. That saved the day. The stock gapped down but rebounded sharply. Not the same space but you do get the drift, right? I think KNDL's a buy if it declines past the $33 line in the sand drawn by Baird. There is still lots of appetite for CRO services in the drug development sector, as evidenced by the hefty btb reported by KNDL.

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