Emergent Biosolutions Stock Looks Attractive Despite A 3x Move

Despite a stellar 2.6x rise since the March 23 lows of this year, at the current price of around $130 per share we believe Emergent Biosolutions (NYSE:EBS), best known for its vaccines, antibody therapeutics, and biodefense related medical devices, looks attractive and it has more room for growth. Emergent stock has rallied from $50 to $130 off the recent bottom compared to the S&P which moved 50%, with resumption of economic activities as lockdowns are gradually lifted. Emergent stock is also up 180% from levels seen in late 2017, a little over two years ago.

Emergent stock has been on a strong rally this year. It declined marginally from $54 in early January to under $50 on March 23, significantly outperforming the broader markets, with the S&P500 down over 30% during the same period, and the stock rallied to near $130 now. Despite the healthy rise since the March 23 lows, we feel that the company’s stock still has potential given its multiple contracts to help drugmakers develop Covid-19 vaccines, along with solid performance in the first half, and a robust outlook in the near to medium term.

Though most of the 180% growth in the stock since 2017 actually came in this year, it is justified by the roughly 2x growth seen in Emergent’s revenues from 2017 to 2019. However, the Net Margins contracted over 65%, and Shares Outstanding grew over 20%, resulting in an EPS decline of around 46%. Given the company’s recent performance, and its role in Covid-19 vaccines, its P/E multiple has expanded from around 50x in 2018 and 2019 to 123x currently, based on trailing earnings. We believe the stock is likely to see more upside despite the recent rally. Our dashboard, ‘What Factors Drove 180% Change in Emergent Biosolutions Stock between 2017 and now?‘, has the underlying numbers.

So what’s the likely trigger and timing for further upside?

The global spread of Coronavirus has meant there just aren’t many people visiting doctors for non-emergency cases, and several types of elective surgeries are being postponed, resulting in lower prescriptions being issued. This trend has impacted sales of several pharmaceutical companies. However, Emergent benefited in the the current pandemic with its sales surging 35% to $587 million in the first half of 2020. Not only did the company see its revenue grow, its Net Margins expanded significantly resulting in Net Income of $80 million compared to a loss of $35 million in the first half of 2019. So what’s going so well for Emergent?

The company has signed multiple contracts with pharmaceutical companies, including Johnson & Johnson, Novavax, Vaxart, and AstraZeneca, for developing vaccines under its contract development and manufacturing (CDMO) business, which accounted for 18% of total sales in Q2, compared to 7% in the prior year quarter. Also, the company has revised its guidance upward, and it now projects sales of $1.55 billion at mid-point of the range, reflecting 40% y-o-y growth. Going by consensus earnings estimate of $6.81, EBS stock is currently trading at just 19x its forward earnings, compared to levels of 50x seen in 2018 and 2019, before the Covid-19 pandemic. We thus believe that there is a significant upside for EBS stock in the near to medium term.

It is not that the company’s benefits are limited to 2020, most of the contracts are multi-year, and the company’s management stated that it now expects the top line to hit the $2 billion mark by 2024, reflecting a strong 80% growth between 2019-2024. As such, the company will likely see steady earnings growth over the coming years. Looking at the broader market, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to boost market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, valuations become important in finding value. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.

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