eResearch Looks Ready to Pick Up Steam

02/26/2007 12:00 am EST

Focus:

Michael Murphy

Former Editor, New World Investor

Completing our look at Top Pros' predictions for 2007, technology and biotech maven Michael Murphy tells why one of his favorites, eResearch, is ready to move higher.

Michael Murphy's 2007 Predictions:

 

2007 High

2007 Low

2007 Close

Dow Jones Industrial Average

15,753

11,197

15,753

Standard & Poor's 500

1,836

1,236

1,836

Favorite Stocks for 2007:
Telkonet ( TKO)
eResearchTechnology (ERES)

See all Top Pros' predictions for 2007

eResearch ( ERES) reported their December fourth quarter in line with the consensus, but below my expectations. I am convinced that each quarter for the rest of this year will be sequentially stronger. At the same time, I do not understand why revenues have not started accelerating yet.

Sales were only $19.9 million [in the quarter], down from $25.4 million last year, yet backlog is up sharply to a whopping $96.4 million. Net income was four cents a share on a GAAP basis, or five cents pro forma. The Street was looking for four cents pro forma on $19.4 million, so they slightly beat the Street's expectations.

The company seems to be setting the guidance bar low enough to make it easy to beat. They are guiding for $95 million to $103 million in sales this year when they have a backlog of $96.4 million already on the books! They already have as many transactions in backlog booked for 2007 as they performed in all of 2006.

There is no shortage of business, and they continue to book new orders at a rate far higher than their quarterly revenues. (The company helps pharmaceutical, biotechnology and medical device companies collect and interpret cardiac-safety and clinical data-Editor.) They have to grow to a $30-million-per-quarter revenue rate in order to complete the work they have on their books.

There used to be a six-month delay between contract signing and commencement of the study. Now the delay apparently has doubled to 12-months. Fortunately, the adjustment appears to be over. Prices for semi-automated studies rose 8% from the September to the December quarter, suggesting less pressure on booking business. It could be that the backlog will steadily build from now on, reflecting a new business model based on a 12-month delay between contract signing and clinical-trial commencement. That would mean revenues would steadily grow to the $30-million-per-quarter level and beyond.

But I still think ERES customers [will] try to accelerate cardiac-safety trials, which would be very good news, jumping us to the $30 million level in June or September, rather than December.

Even without that, though, I think the stock is past its bottom and headed up for many years to come. [Closing last Friday above 7], it was selling for 3.5x this year's sales and 24x earnings guidance, with sales expected to grow 19% and earnings 25%. ERES remains a Top Buy all the way up to $16, and I think my $30 target is just a matter of time.

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