Covance (NYSE:CVD) has become a victim of its own success.
The 2005 performance of this drug-research services company was impressive, with burgeoning revenue growth and rising operating margins fueling a strong earnings performance. But first-quarter results, while solid, fell short of investors' expectations, leading the market to bid the stock down by 5% on Thursday. Covance shares likely will remain under pressure in the near term as the company hits some speed bumps, but it's probably safe to say that its best days are not behind it.
Net revenue in the first quarter rose 14% year over year to $320 million, while net income, after adjusting last year's results for new stock-based compensation rules, climbed 31% to $33.4 million, or $0.52 per share. There appears to be little to complain about here, but apparently the company's revenue missed analysts' expectations.
Earnings per share were actually a penny above forecasts, and Covance continued to deliver solid operating margins. That metric hit 14.3% including stock-based compensation expense. When adjusting last year's first-quarter results for the stock compensation effect, operating margin was 12.8%.
As for future trends, there was a bit of good and bad news. On the positive side, Covance snagged a $29 million contract for extension and expansion for dedicated toxicology space from a top-10 pharmaceutical client. Such long-term agreements help insulate the company from the shock of cancellations that plague Covance and other drug research service providers, such as Charles River Laboratories (NYSE:CRL) and PPD (NASDAQ:PPDI).
On the other hand, another development showed that Covance is not immune to disruption arising from issues that its customers face. The firm disclosed that conversion of backlog into revenue in its late-stage drug development business will be slower in the second and third quarters, because three large studies were being delayed. Unfortunately, Covance can't do much about this problem.
On balance, though, Covance remains a very solid company. Backlog is a whopping $1.72 billion, and its contracts with major pharmaceutical companies suggest that it is becoming a preferred provider for these cash cows. It remains a winner in the contract research space.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
