Sometimes after a stock has a good run, the analysts on Wall Street start to get a little gun-shy, especially if they made a good call on the stock and it went up smartly. Often they will cut the rating a notch, but keep the price target the same, or even move it a touch higher. Then they can have it both ways. They have cut the rating if it goes down, but they raised the price target if it goes higher.
A new Jefferies report focuses on three companies that could have some of the qualities that are matched in this thesis. They also are companies that for one reason or another took a shot as the sector they belong to got hit. All three are rated Buy at Jefferies.
Celgene
This was one of the top biotech picks for 2016 at Jefferies. Celgene Corp. (NASDAQ: CELG) has an outstanding partnered pipeline. which most think is low risk and has the potential to yield several blockbuster drugs. Certain Wall Street analysts also think the company can grow earnings 15% on a compounded annual growth rate basis going forward.
Otezla, which treats psoriasis and psoriatic arthritis, had achieved considerable prescriptions among physicians but the scripts have slowed after a solid launch, showing the importance for sales outside of the United States. Celgene’s blockbuster blood cancer drug Revlimid continues to dominate. Pomalyst sales also continue to be solid. Cancer drug Abraxane is also growing at a respectable rate, so the company continues to have a strong lineup of top-selling drugs.
The company recently reported fourth-quarter financial results that showed year-over-year growth on the top and bottom lines but came in short of Wall Street’s consensus forecast. It is worth noting that the net negative impact of currency on net product sales was 1%.
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The stock jumped when Celgene and Natco reached settlement over a patent, which removes a huge overhang on the stock that has been there for some time. Revlimid makes up over 60% of the company’s total revenue, and the analysts note that typically the first quarter is seasonally soft for the drug. The Jefferies estimates for the quarter are pretty much in line with the street, but a slowing of dollar strength would be a plus for the company.
Jefferies actually lowered its price target for the stock to $131. The Thomson/First Call consensus price target is higher at $137.95. The shares closed Wednesday at $108.22, up almost 6% on the day.
NVIDIA
This is another top tech stock that reported outstanding earnings, and it is also a member of the Jefferies Franchise Picks list. NVIDIA Corp. (NASDAQ: NVDA) is one of the leaders when it comes to supplying graphics processing technology for the 3D graphics market, including desktop graphics processors and gaming consoles. It is also moving into visual computing chips for cars, mobile devices and supercomputers. NVIDIA has a technology partnership with electric car maker Tesla.
The company has been able to use its ability to leverage past investments, with a more controlled spending structure ahead on unified, which enables strong cash flow that is allowing a focus on capital return, which is currently estimated to be $1 billion next year.
The monster earnings for the past quarter beating beat both sales and earnings estimates handily, and the company also provided guidance that was better than expected. Jefferies feels the stock is maturing to a platform company from a pure chip company, and they see the stock as a call option on fours secular trends: virtual reality, PC gaming, chips in the automobile industry and graphic processing units in the cloud.
The Jefferies team repeated their very strong stance on the company after the recent analysts day, and they really do not think the market is giving the stock the credit it deserves for the potential upside.
NVIDIA investors are paid a 1.45% dividend. The Jefferies price objective is set at $42, and the consensus target is much lower at $33.76. The stock closed Wednesday at $35.80 per share.
Vertex Pharmaceuticals
This stock has long been considered a buyout candidate, and after the mauling it took in the biotech sell-off to start the year, it is even more of a candidate now. Vertex Pharmaceuticals Inc. (NASDAQ: VRTX) engages in the discovery, development, manufacturing and commercializing small molecule drugs for patients with serious diseases in specialty markets. The company focuses on developing and commercializing therapies for the treatment of cystic fibrosis and hepatitis C.
Wall Street as a whole has long been very positive on the stock, and some have indicated that the company could have as much as $10 in potential earnings per share power. The consensus also expect that Vertex should receive FDA approval for the company’s cystic fibrosis drug Lumacaftor (VX-‘809), which some think could generate billions in revenues.
The Jefferies analysts note that even if there were a potential miss for this quarter, any clarity that management can provide for full-year expectations, confidence in European Union reimbursement processes or enthusiasm about ongoing Phase 1 efforts for market-expanding next-gen correctors, could help shares continue the recent bounce back. All of Wall Street is focused on the numbers for the Orkambi launch, and the analysts are at $235 million versus the consensus number of $264 million, and any full-year guidance for the drug is expected to be very conservative.
The Jefferies price target was lowered to $108, and the consensus target price is higher at $126.50. Shares closed up big at $91.31 on Wednesday, a jump of 8.5%.
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While these are all very aggressive stocks, and only suitable for risk tolerant accounts, they could have big upside potential. Investors may want to scale buy some shares and keep some dry powder, should any of the earnings data knock prices back.
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