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List of Articles Stocks and Investing Stocks I Own Stock Advice Weight Loss and Fitness Sports Donate Back to Home	A Financial Analysis of Covance Incorporated Introduction Covance (CVD) is a $4.48 billion company in the biotechnology and drugs industry. Market capitalization competitors in this industry include Barr Pharmaceuticals, Hospira, and AmerisourceBergen. The biotechnology and drugs industry is down 3.20% over the past year compared to the S&P 500 which is down 2.94% during the same period. Over the past month, the industry has been up 0.61%, while the S&P 500 has been down 0.22%. After a strong sell-off earlier in the past month, there is a strong potential for oil and gas companies to grow. Evidence comes from a strong future due to population changes and an unwarranted economic sting in the industry’s share price. Covance’s growth and valuation illustrate the potential for a strong earnings report next quarter. Business This section describes what Covance produces. According to Reuters, Covance “is a drug development services company that provides a range of early-stage and late-stage product development services on a worldwide basis primarily to the pharmaceutical, biotechnology and medical device industries.” This company also focuses on testing certain types of chemical and agricultural products. The two main business segments for Covance include early development and late development. The early development business segment includes services such as preclinical and clinical. The preclinical services deal with chemical and toxic services. These services illustrate how animals and chromosomes are affected from certain types of drugs. The agricultural services take the field of determining risks to humans from pesticides and other types of chemicals. Covance’s next business segment is late-stage development. Most of the activities in this segment involve testing during late stages. Some of the testing procedures include looking cardiac testing and new drug application testing. The most interesting aspect of this company is the global presence. As the dollar continues to free fall against major currencies (especially the Euro), there is huge potential for multinational companies to take advantage of these lows. A lower dollar will mean higher exportations for Covance, which leads to a higher profit. Growth Covance has illustrated solid growth prospects over the past year. According to Reuters, Covance reported a $2.50 billion revenue product last year. This number is over 16.03% higher than it was the previous year. Compared to the industry’s average of 22.42%, investors may question such variable differences. However, investors should remember that Covance reports a fairly high revenue figure compared to other market-cap competitors. AmerisourceBergen reported only a 5.45% increase. Moreover, Covance’s earnings growth at 21.29% is also solid compared to some industry competitors over the past year. Hospira actually reported a decrease in earnings of 11.60% and AmerisourceBergen saw growth at a moderate 10.70%. What’s more interesting between these two figures is the five year averages that Covance holds. Covance’s respective five year revenue and earnings are 12.03% and 21.27%. Therefore, there is only a small difference between this year and the five year average numbers. However, the share price and investors have appreciated this gradual increase, as shown through capital gain appreciation over the past five years. Moreover, Covance has kept its costs under control. According to Reuters, Covance has reported gross, operating, and net profit margins of 32.41%, 14.01%, and 10.63% respectively over the past year. Moreover, these numbers are above the company’s five year averages of 32.22%, 13.52%, and 9.63%. The five year averages are also better than the industry’s respective operating and net income five year averages of 12.95% and 13.45%. Therefore, Covance has proved to be a solid company in this industry. Its services are well-controlled cost wise, especially to direct market-cap competitors. Hospira reported respective operating and net income margins last year of 8.81% and 3.98%. Barr only reported operating margins of 12.50% and net income margins of 5.73%. Therefore, Covance is not only growing very well, but keeping its costs contained. Compiling all this information together and investors comes across ROE. Over the past year, Covance reported an ROE of 17.30%. Therefore, out of all shareholder equity, more than 17% come from earnings instead of debt or stock. This number is much better than the industry average of 13.54% and competitor averages of 8.81% (Hospira), 14.11% (AmerisourceBergen), and 8.53% (Barr). Not to mention, Covance’s current year ROE is also better than the company’s five year average of 16.94%. Therefore, Covance has a history of strong earnings per its equity share—which reflects the strong capital gain movement over the past year. And if history is any indication, there should be no reason why Covance cannot continue its success. The same logic applies to Covance’s 12.14% ROA (above average) and 15.70% ROI (above industry average). Valuation With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not strictly the case. It is true that Covance has a forward P/E ratio of and a forward price to sales ratio of compared to the industry’s respective 28.18 and 7.55, but there is a different picture to consider. Currently Covance shows a 26.50 P/E ratio and 3.10 price to sales ratio. However, because the company has an above average ROE, the valuation is justified. Investors see the company as a strong, growing corporation that is worth the extra share price level to invest in. They foresee higher earnings and growth and will pay more now to reap the benefits. What makes these remarks even more enticing is that firms that aren’t growing so greatly (Barr), have higher multiples. That idea shows overvaluation, not the idea Covance is currently in. Moreover, Covance has a low PEG ratio compared to other competitors’ numbers. Efficiency Covance is efficient. Inventory turnover at 21.12 is excellent compared to other industry market-cap rivals (average of 3.34). Moreover, asset turnover is also strong at 1.14 compared to competitor figures. Receivables turnover also illustrates a number of 7.71, illustrating cash received every 47 days. In terms of liquidation, Covance’s current ratio is 2.15. Some investors may wonder about such a highly risky figure, but because interest rates are low and Covance is a reputable company, incurring extra cash from loans may not be such a bad idea. The company’s capital expenditures have increased (24.66%), which means further increases in capacity and economies of scale may be present in the future, because of this financing. Moreover, institutions own 87.65% of all Covance shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability. Technical Analysis Covance performed well in the past year. The company’s share price has increased 41.49% year-to-year. This type of growth is excellent for a recessionary-type economy, especially considering the competition in the oil and gas industry. There seems to be some support at the 82 dollar share price range dating back to earlier January 2008. The last time Covance reached this amount the company rebounded and appreciated 4%. There is a possibility a similar or better situation could occur in the future. More specific to the current month, Covance illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 49.52, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Covance according to technical analysis, purchasing shares will still produce strong long terms gains. Conclusion Covance is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise. -Dennis Biray March 7th, 2008 ©2008 BirayNetworks. All Rights Reserved

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A Financial Analysis of Covance Incorporated

Introduction

Covance (CVD) is a $4.48 billion company in the biotechnology and drugs industry. Market capitalization competitors in this industry include Barr Pharmaceuticals, Hospira, and AmerisourceBergen. The biotechnology and drugs industry is down 3.20% over the past year compared to the S&P 500 which is down 2.94% during the same period. Over the past month, the industry has been up 0.61%, while the S&P 500 has been down 0.22%. After a strong sell-off earlier in the past month, there is a strong potential for oil and gas companies to grow. Evidence comes from a strong future due to population changes and an unwarranted economic sting in the industry’s share price. Covance’s growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what Covance produces. According to Reuters, Covance “is a drug development services company that provides a range of early-stage and late-stage product development services on a worldwide basis primarily to the pharmaceutical, biotechnology and medical device industries.” This company also focuses on testing certain types of chemical and agricultural products. The two main business segments for Covance include early development and late development.

The early development business segment includes services such as preclinical and clinical. The preclinical services deal with chemical and toxic services. These services illustrate how animals and chromosomes are affected from certain types of drugs. The agricultural services take the field of determining risks to humans from pesticides and other types of chemicals.

Covance’s next business segment is late-stage development. Most of the activities in this segment involve testing during late stages. Some of the testing procedures include looking cardiac testing and new drug application testing. The most interesting aspect of this company is the global presence. As the dollar continues to free fall against major currencies (especially the Euro), there is huge potential for multinational companies to take advantage of these lows. A lower dollar will mean higher exportations for Covance, which leads to a higher profit.

Growth

Covance has illustrated solid growth prospects over the past year. According to Reuters, Covance reported a $2.50 billion revenue product last year. This number is over 16.03% higher than it was the previous year. Compared to the industry’s average of 22.42%, investors may question such variable differences. However, investors should remember that Covance reports a fairly high revenue figure compared to other market-cap competitors. AmerisourceBergen reported only a 5.45% increase. Moreover, Covance’s earnings growth at 21.29% is also solid compared to some industry competitors over the past year. Hospira actually reported a decrease in earnings of 11.60% and AmerisourceBergen saw growth at a moderate 10.70%. What’s more interesting between these two figures is the five year averages that Covance holds. Covance’s respective five year revenue and earnings are 12.03% and 21.27%. Therefore, there is only a small difference between this year and the five year average numbers. However, the share price and investors have appreciated this gradual increase, as shown through capital gain appreciation over the past five years.

Moreover, Covance has kept its costs under control. According to Reuters, Covance has reported gross, operating, and net profit margins of 32.41%, 14.01%, and 10.63% respectively over the past year. Moreover, these numbers are above the company’s five year averages of 32.22%, 13.52%, and 9.63%. The five year averages are also better than the industry’s respective operating and net income five year averages of 12.95% and 13.45%. Therefore, Covance has proved to be a solid company in this industry. Its services are well-controlled cost wise, especially to direct market-cap competitors. Hospira reported respective operating and net income margins last year of 8.81% and 3.98%. Barr only reported operating margins of 12.50% and net income margins of 5.73%. Therefore, Covance is not only growing very well, but keeping its costs contained.

Compiling all this information together and investors comes across ROE. Over the past year, Covance reported an ROE of 17.30%. Therefore, out of all shareholder equity, more than 17% come from earnings instead of debt or stock. This number is much better than the industry average of 13.54% and competitor averages of 8.81% (Hospira), 14.11% (AmerisourceBergen), and 8.53% (Barr). Not to mention, Covance’s current year ROE is also better than the company’s five year average of 16.94%. Therefore, Covance has a history of strong earnings per its equity share—which reflects the strong capital gain movement over the past year. And if history is any indication, there should be no reason why Covance cannot continue its success. The same logic applies to Covance’s 12.14% ROA (above average) and 15.70% ROI (above industry average).

Valuation

With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not strictly the case. It is true that Covance has a forward P/E ratio of and a forward price to sales ratio of compared to the industry’s respective 28.18 and 7.55, but there is a different picture to consider. Currently Covance shows a 26.50 P/E ratio and 3.10 price to sales ratio. However, because the company has an above average ROE, the valuation is justified. Investors see the company as a strong, growing corporation that is worth the extra share price level to invest in. They foresee higher earnings and growth and will pay more now to reap the benefits. What makes these remarks even more enticing is that firms that aren’t growing so greatly (Barr), have higher multiples. That idea shows overvaluation, not the idea Covance is currently in. Moreover, Covance has a low PEG ratio compared to other competitors’ numbers.

Efficiency

Covance is efficient. Inventory turnover at 21.12 is excellent compared to other industry market-cap rivals (average of 3.34). Moreover, asset turnover is also strong at 1.14 compared to competitor figures. Receivables turnover also illustrates a number of 7.71, illustrating cash received every 47 days. In terms of liquidation, Covance’s current ratio is 2.15. Some investors may wonder about such a highly risky figure, but because interest rates are low and Covance is a reputable company, incurring extra cash from loans may not be such a bad idea. The company’s capital expenditures have increased (24.66%), which means further increases in capacity and economies of scale may be present in the future, because of this financing. Moreover, institutions own 87.65% of all Covance shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability.

Technical Analysis

Covance performed well in the past year. The company’s share price has increased 41.49% year-to-year. This type of growth is excellent for a recessionary-type economy, especially considering the competition in the oil and gas industry. There seems to be some support at the 82 dollar share price range dating back to earlier January 2008. The last time Covance reached this amount the company rebounded and appreciated 4%. There is a possibility a similar or better situation could occur in the future.

More specific to the current month, Covance illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 49.52, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Covance according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

Covance is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
March 7th, 2008