We are launching coverage of Catalent Inc. (CTLT), a manufacturing and development partner for biotech and pharmaceutical companies, with a "buy" rating, explains David Toung, an analyst at Argus Research, a leading independent Wall Street research firm.

Catalent has signed 30 agreements with coronavirus vaccine and therapy developers, including Johnson & Johnson (JNJ), AstraZeneca (AZN), and Arcturus Therapeutics (ARCT), and believes that it has about 100 potential development and manufacturing opportunities related to COVID-19 programs.

Catalent provides advanced delivery technologies and development solutions for drugs, biologics, and consumer health products, and is expanding its cell and gene therapy capabilities through acquisitions.

It is also growing through acquisitions. In January, it acquired a facility in Anagni, Italy, expanding its European capabilities in biologic drug production and oral solid dose manufacturing. In February, it acquired MaSTherCell Global, adding to its capabilities in advanced biotherapeutics.

Catalent reported fiscal 3Q20 results on May 5. Adjusted EPS rose to $0.50 from $0.49 a year earlier. GAAP net income attributable to common shareholders was $11.8 million or $0.08 per share, down from $31.7 million or $0.22 per share in the prior-year quarter. Net revenue rose to $760.6 million (+23% as reported and +25% on an operational basis).

Management has updated its FY20 guidance to reflect the onboarding of new business as well as higher operating expenses related to COVID-19 preparedness. It expects any lost revenue from the pandemic to be offset by new business, and reiterated its full-year revenue forecast of $2.87-$2.95 billion.

Based on this guidance, we are setting adjusted EPS estimates of $1.85 for FY20 and $2.15 for FY21. Our five-year EPS growth rate forecast is 12%. 

The shares have risen 90% over the past three years, and are currently trading at 32-times our FY21 EPS estimate, above the average multiple of 24 for our coverage universe of life science stocks.

However, we believe that the stock merits a premium valuation based on the company’s large addressable market, expanding development and manufacturing capabilities, and strong long-term growth prospects. As such, we are launching coverage with a "buy" rating and a target price of $100.

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