Why Cubist Pharma Shares Rallied

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Cubist Pharmaceuticals (NASDAQ: CBST  ) popped 3% today after Mizuho Securities upgraded the biotechnology company from "neutral" to "buy."

So what: Along with the upgrade, analyst Mario Corso raised his price target on the stock to $77 (from $50), representing about 54% worth of upside to yesterday's close. While bargain hunters might be turned off by the stock's red-hot run in 2013, Corso's valuation work -- which now includes Cubist's pending acquisitions of Optimer Pharmaceuticals and Trius Therapeutics -- suggests that the risk/reward trade-off is still very appealing.

Now what: Using a discounted cash flow model, Mizuho valued Cubist at $77, $96, and $51 in three different revenue/EPS scenarios.

"Catalysts for achieving our price target are the transactions closing/integration by year end 2013, CBST financial guidance in early 2014, CXA-201 Phase III data by year end, and FDA approval of tedizolid toward mid-2014," Mizuho noted.

With Cubist shares up about 65% from its 52-week lows, and trading at a forward P/E of 34, however, I'd wait for a wider margin of safety before betting on those catalysts. 

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