Shares of SFBC ( SFCC) are looking a bit healthier than they did last week. Following an earlier delay, which sent its shares into a tailspin, the company has finally issued its long-awaited fourth-quarter results and guidance for the current year. Net income, hurt by a big impairment charge and recent legal fees, fell 36% to $3.8 million in the latest period. Excluding special items, however, the company's fourth-quarter profit of 42 cents a share actually topped Wall Street expectations by 2 cents. Looking ahead, SFBC is now forecasting a drop in this year's profit due to a sharp falloff in business at its scandal-plagued clinic in Miami. Specifically, the company is anticipating operating profit of between $1.44 and $1.58 a share this year. The midpoint of that outlook is well off the $1.88 a share in operating profit the company reported for 2005. Bad publicity about SFBC's operations in Miami, which specializes in running early-stage drug trials, has clearly taken a toll on the company's overall performance. For the first time, SFBC has broken out figures showing the different operating margins for its early-stage and late-stage businesses. As previously calculated by TheStreet.com, the company's early-stage trials boast a much higher operating margin -- exceeding 22% -- than does its late-stage operations. SFBC's late-stage business, which has an operating margin of 13%, is currently the company's only source of growth. Still, investors -- fearing the worst after last week's delay -- seemed relieved to finally have some guidance. After pushing the stock lower during the regular session on Wednesday, they sent it rocketing 15% to $21.06 in after-hours trading.
Risky BusinessBy now, however, SFBC has lost nearly half of its market value since Bloomberg first started exposing problems about the company four months ago.
Bloomberg has raised major safety concerns about the company's flagship clinic in Miami -- the source of an impairment charge that could total $24 million -- as well as a Montreal-based site run by its Anapharm division. In Montreal, Bloomberg reported on Wednesday, a total of 20 people have now tested positive for latent tuberculosis after being exposed to a drug-trial participant suffering from the active disease. Last week, Baird analyst Eric Coldwell listed the issues raised by Bloomberg as the No. 1 risk facing the company. However, Coldwell didn't stop there. He mentioned the company's limited financial transparency, its perceived accounting weaknesses and its sizable debt load -- which could suggest possible liquidity risks -- as well. Coldwell did seem less concerned than some by SFBC's announcements last week but cautioned investors to remain on the sidelines, for the time being, anyway. "With the exception of the earnings delay, these items were not surprising and -- if anything -- expected, and should largely be backed into valuation," wrote Coldwell, who had a neutral rating and a $25 price target on the stock at the time. But "challenges clearly remain, and it is unclear just how the path and timing of remediation may play out." Baird maintains a trading market in SFBC's securities and hopes to obtain investment banking business from the company over the next three months.
Stab in the DarkJefferies analyst David Windley last week suspended his buy recommendation on SFBC's stock until he could obtain more details from the company. He explained that any estimates he could offer on his own would be "a stab in the dark" in the meantime. Jefferies advised SFBC on its acquisition of PharmaNet and helped the company last year with a secondary offering of its stock.
Prior to last week's delay, Wall Street was looking for 2006 profit of $1.75 a share from the company. Stanford analyst Rebecca Kujawa had hoped for even better. Her 2006 profit estimate of $1.85 a share came in higher than any of her peers' estimates. "We believe investors are expecting SFCC to be more cautious on its 2006 outlook versus that which it provided in December," Kujawa acknowledged last week. "But we do not know whether SFCC will be as cautious as consensus currently expects." At the time, Kujawa portrayed SFBC's pending update as "an important milestone" in the company's recovery. She went on to say that investors would no doubt welcome unchanged or even slightly lowered guidance from the company. But SFBC abruptly pulled its previous guidance the following day -- replacing it only now -- instead. To be fair, Kujawa cautioned investors last week that SFBC "continues to fight fires on many fronts and the road to recovery may be bumpy." In the meantime, she said, the company's stock should trade at a much lower multiple than it once did. Kujawa, whose firm makes a market in SFBC securities, has a hold recommendation and a $22 price target on the stock. "We believe a discount is appropriate," she explained, "as there remains some risk that not all of the bad news is publicly known and SFCC is just starting on its path to recovery."