Covance (NYSE:CVD) closed a remarkable year with robust business wins and ongoing improvements in productivity. The future continues to look quite bright for the drug development services provider, even if one key metric is showing signs of slowing.
For all of 2005, revenue climbed 16.9% to $1.19 billion, while earnings per share jumped 23.7% to $1.88. In the fourth quarter, meanwhile, year-over-year revenue surged 19.9% to $322.3 million, and EPS increased 11.9% to $0.47. If fourth-quarter earnings growth seems a bit tepid, that's because it was affected by a one-term charge related to the repatriation of foreign earnings. Excluding that charge, fourth-quarter per-share earnings were up an impressive 28.6% to $0.54 per share, and full-year earnings on that basis were up 27.6% to $1.94.
One of the keys to Covance's success has been continued growth in operating margins. Indeed, the fourth quarter was another record breaker, as operating margins reached 15%, compared with 14.2% in 2004's fourth quarter. Still, the margin widening may be petering out -- after all, the previous record was 14.9%, which was achieved in the third quarter. Management is promising more expansion in 2006, but it's probably wise not to expect massive gains.
Of course, there's still plenty of good news at Covance. It certainly won't want for future business. Backlog reached a record $1.67 billion on the back of record new orders in the fourth quarter of $434 million. And the firm continues to cultivate deep relationships with its clients, as it signed two dedicated capacity contracts for $34 million in the quarter. Finally, as capital expenditures slow a bit, the firm is targeting $90 million in free cash flow in 2006, a welcome improvement from $28.9 million this year.
Covance is projecting per-share earnings of at least $2.33 in 2006, a 20% increase over adjusted 2005 EPS. That's slower growth than the company achieved in 2005, but its robust backlog growth and dedicated contract wins are signs that Covance is successfully competing against rivals like Charles River Laboratories (NYSE:CRL). As a long-term investment, Covance looks like a good bet.
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Fool contributor Brian Gorman owns no shares of any company mentioned in this article.
