Is Momenta Pharmaceuticals the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Momenta Pharmaceuticals (Nasdaq: MNTA  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Momenta Pharmaceuticals.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 74.7% Pass
  1-Year Revenue Growth > 12% 858.7% Pass
Margins Gross Margin > 35% 100.0% Pass
  Net Margin > 15% 57.7% Pass
Balance Sheet Debt to Equity < 50% 0.6% Pass
  Current Ratio > 1.3 18.97 Pass
Opportunities Return on Equity > 15% 63.4% Pass
Valuation Normalized P/E < 20 12.93 Pass
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
       
  Total Score   8 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With a score of 8, Momenta Pharmaceuticals falls just shy of perfection. The biotech is soaring on a wave of recent success, but the question still remains where the company goes from here.

Last summer, Momenta got long-awaited good news: the FDA had approved its generic version of Sanofi's (NYSE: SNY  ) Lovenox, a billion-dollar blockbuster drug that had been a core part of Sanfoi's success. With help from Novartis (NYSE: NVS  ) , Momenta's commercialization partner, Momenta quickly launched the generic and saw revenue soar from $16 million in the second quarter of 2010 to $191 million in 2011's first quarter.

How long the good times will last, though, remains to be seen. Most of Momenta's momentum comes from the fact that it has the only competitor to Lovenox and is therefore able to sell its version at a price close to the original. But with other generic versions possibly coming from Teva Pharmaceutical (Nasdaq: TEVA  ) as well as a partnership between Amphastar Pharmaceuticals and Watson Pharmaceuticals (NYSE: WPI  ) , Momenta's impressive margins could contract in a hurry.

With shares trading at around $19, it's clear that shareholders aren't counting on earnings per share of more than $2 per quarter lasting very long. But even when the inevitable competition comes, Momenta may still have good earning potential for venturesome investors.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Momenta Pharmaceuticals to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended Momenta Pharmaceuticals, Teva Pharmaceutical, and Novartis. The Motley Fool owns shares of Momenta and Teva. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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  • Report this Comment On May 16, 2011, at 12:07 PM, hiddenflem wrote:

    So basically it's impossible for a company that doesn't pay dividends to get an "A"? So even Apple can't be a perfect company until it starts paying a dividend... seems like the scale needs some evaluation to me.

  • Report this Comment On May 16, 2011, at 6:15 PM, nvstwmeBoyz wrote:

    After reading this article it is clear Fool's need help in doing thorough due diligence.

    1.) Momenta is an outstanding company with a bright future, however, it does not earn $2 a quarter. Currently, Momenta is on track to earn between $3.70-$4.10 in FY 2011 (or between $0.92-1.02/quarter). Momenta's earnings are currently being helped by its NOL Carryforwards which should allow Momenta to avoid paying any taxes until 2012 (i.e., Momenta has an effective tax rate of 0% in FY 2011) . In FY 2012, Momenta will likely earn between $2.20-$2.50, as a result of the having to pay Uncle Sam. The $2.20-2.50 does NOT include any earnings from potential sales of generic Copaxone for which Momenta is waiting for Final Approval.

    2.) Momenta has a rock hard balance sheet and very significant free cash flows. It currently has over $5/per share in net cash and should end the year with $8/share in net cash. Net cash could exceed $10/share by year end if Momenta is successfully in inking a partnership for either its FoB platform or M118.

    3.) Every article written on Momenta talks about the concern that it has the sole generic for Lovenox and it may face competition in the future. That is obviously an issue, HOWEVER, let's look at the facts.

    (a.) First - Amphastar Pharmaceuticals and Watson Pharmaceuticals. Amphastar has sued the FDA regarding its ANDA filing for generic Lovenox and the FDA has replied back (in lamen's terms) "If the chances of your approval were designated by distance with a shorter distance meaning you're closer to approval, we would place your distance between 100,000 miles and infinity." Amphastar and Watson have all but accepted their fate of never obtaining approval and thus have given up discussing generic Lovenox.

    (b.) Second - Teva. Teva has spent an additional 3 years in trying to obtain FDA approval for generic Lovenox (2 year head start on Momenta and 10 months since Momenta obtained approval in late July 2010) but no such luck. In addition, Teva's management team has done a full 180 since July 2010 initially commenting they expected Lovenox approval next month, then next quarter, then by year end, to we expect to hear something in January 2011. And well, they did. Teva obtained a deficiency letter in January 2011 that basically told them the same thing the FDA told Amphastar and Watson "your generic Lovenox is as close to approval as Earth is to Jupiter". Since receiving this letter Teva's management team has decided that they will not comment on their generic verson of Lovenox until they obtain approval. In Teva's last earnings conference call, Teva's Bill Marth commented that its generic Lovenox version is "alive and well" but we will make no other comments until we receive approval. If it was "alive and well" why not say a little something more like --- we submitted responses to the FDA regarding the deficiency letter, we had discussions with the FDA, we did something more than just say its "alive and well". Like mom use to say... "If you don't have anything good to say, say nothing at all".

    In addition, Momenta has sued Teva for patent infringement regarding its version of generic Lovenox. The judge overseeing this case has scheduled the trial start date for September 2013 (yes, you read that correctly 2013!!). Why is this important? Because the judge has direct knowledge and confidential information regarding Teva's FDA approval chances. If Teva was anywhere close to approval he would have NOT scheduled the trial for Fall 2013 but some earlier date (Spring 2012).

    Based on the above, Momenta investors can sleep soundly at night as they count (with a big smile on their face) the $750-800K in free cash flow Momenta is earning per day. And they can dream of the day (likely to happen over the next 6-15 months) when Momenta receives final FDA Approval for generic Copaxone.

  • Report this Comment On May 29, 2011, at 11:31 PM, sutallee wrote:

    If in the next 6-15 months Momenta receives final FDA Approval for generic Copaxone what do you estimate the pps to be?

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