Genentech Ready to Lead Biotech Earnings Bias (DNA, BIIB)

Genentech Inc. (NYSE: DNA) is set to report earnings after the close of trading today.  The largest biotech in the U.S. is expected to post $0.86 EPS on $3.23 Billion in revenues according to First Call.  For next quarter estimates are $0.87 EPS on $3.32 Billion in revenues.  For fiscal 2008, estimates are $3.43 EPS on $13.03 Billion in revenues.

So how does this rank in biotechs and drug companies?  Genentech, based on a $76.13 (after a 2% drop today) has a forward P/E ratio for 2008 of 22.2.  With a $79.9 Billion market cap, it trades at about 6.15 times revenues.  With 2009 estimates at $3.90 EPS and $14.2 Billion in revenues, Genentech trades with forward multiples for 2009 of 19.5-times earnings and about 5.6-times revenues.

Just last week, Jim Cramer named Genentech as a safe spot to hide out in during a bear market or during a tough economy.  The only problem is that we’ve heard him say that before and seen it tank thereafter.  In fact, this stock seems to have a high-$60’s to low-$80’s trading range that has been in place over the last year and it has technically qualified as a "dead money stock" since the end of 2005.

Analysts have an average price target north of $86.00 and its 52-week trading range is $65.35 to $82.20.  If you look at today’s options prices, it appears as though options traders are only expecting a move of about $2.00 in either direction after the earnings.

The issue that has been around Genentech for some time is that Wall Street analysts have either been making too bold of predictions and estimates for the company’s cancer drugs.  Of course you could also set that to be interpreted as the company not  being able to deliver.  The focus on all of its major drugs rather than a big picture of the company’s growth has won every single quarter of late. 

As a reminder, Roche owns the majority stake of Genentech so its $79.9 Billion market cap is quite misleading when you consider the real float of the stock. It also has a key drug partnership with Biogen-Idec (NASDAQ: BIIB) for its Rituxan.

Jon C. Ogg
July 14, 2008