Hare's to the Tortoise!

10/07/2008 11:00 am EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Ian Wyatt, editor of Growth Report, says a plodding pharmaceutical and chemical supplier may be just the ticket in today's shaky market.

Aesop's fable of the tortoise and the hare holds true for so many aspects of life, and none more than investing. Flashy, glamorous investments titillate, to be sure, but it's always the steady, methodical plodders like Aceto (Nasdaq: ACET) that get the job done-and that job is creating wealth.   

Incorporated in 1947, the company is a global leader in sourcing, marketing, and distributing more than 1,000 chemically derived pharmaceuticals, biopharmaceuticals, specialty chemicals, and agrochemicals worldwide.

Aceto is a true global player, sourcing approximately 67% of its products from Asia, buying from approximately 500 companies in China and approximately 200 companies in India. No customer or product accounts for more than 10% of revenue.  

The largest segment, health sciences (56% of sales), includes active pharmaceutical ingredients (APIs), pharmaceutical intermediates, nutraceuticals, and biopharmaceuticals. APIs for generic drugs offer the greatest potential.

Aceto's other major segment, chemicals and colorants (37% of sales), is a leading supplier to the many different industries that require chemical raw materials and additives. Products within this segment include intermediates for dyes, pigments, and agrochemicals.

Aceto operates in many tortoise-like markets. [But] recently, management has proven that it can instill Aceto with a few favorable hare-like qualities.

In fiscal 2008 (ended June 30th), revenue posted at $359.6 million, a 14.7% increase over fiscal year 2007, with gross profit increasing 23.5%. Bottom-line growth was equally impressive: Net income for the year posted at $13.5 million, or 54 cents per share, compared with 41 cents per share, for fiscal year 2007.  

But Aceto's tortoise-like balance sheet might be of greater interest. Aceto has no long-term debt, a current ratio (current assets covering current liabilities) of 3.1x, and $47 million in cash (or $1.95 a share). Aceto is well-positioned to survive any shocks the world's economy sends its way. Financial safety cannot be overstressed in today's volatile, risk-averse market.    

Tortoises command little attention on Wall Street, and Aceto is no exception. The off-Wall Street investment house Sidoti & Company expects Aceto to earn 66 cents a share for fiscal year 2009.   

We expect Aceto's EPS growth to average 10% over the next three years, which could also be conservative; discounted at an 11% cost of capital, we arrive at a 12-month price target of $12.75 a share—a 60% price upshot from current levels [around $8], which leads to an above average industry P/E multiple of 19x.  

Aceto is able to combine the best aspects of both the tortoise and the hare: It has a long history of producing earnings while limiting financial risk. Recent moves towards globalization (half the company's revenue is derived overseas, compared with 5% 12 years ago) have enabled Aceto to sprint ahead of its competitors in many markets, despite stagnating conditions. But unlike the hare in Aesop's fable, we expect Aceto to remain ahead of the competition for the long haul

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