Once again, investors appear displeased with Covance (NYSE:CVD). Despite continued positive signs in the drug development company's latest earnings report, the stock is down slightly in recent trading. Pessimism aside, though, Covance looks poised for another strong year.
In the fourth quarter, the Princeton, N.J.-based firm posted net revenue of $343 million, a year-over-year gain of 6.4%. Net earnings, meanwhile, climbed to $38.3 million, an increase of 20.7% year over year, after factoring out a one-time tax charge incurred in 2005's fourth quarter.
Covance continued to show that it can keep increasing efficiency -- operating margins hit an all-time high of 15%. To be sure, the new record is a modest rise from the 14.9% achieved in the third quarter of 2005. Still, Covance continues to promise more margin improvement in 2007, and given its track record to date, it's a safe bet that it will deliver on this forecast.
Meanwhile, the ongoing growth in Covance's backlog suggests that it is taking market share. Backlog hit $2.2 billion in the fourth quarter, up by one-third from the end of 2005. In addition, Covance revealed that it has signed up a fifth customer, a "top 10" pharmaceutical firm, for a dedicated multiyear capacity contract.
The $55 million deal is relatively modest, but such arrangements will help smooth out earnings when Covance is inevitably hit by sudden contract delays or cancellations. In addition, the firm's ability to land more major drug developers for long-term deals shows that Covance's reputation is on the rise.
Some might be concerned about the ongoing travails at Covance's pharmaceutical clients. Pfizer (NYSE:PFE), for instance, recently announced a wave of layoffs. However, tough as these cutbacks are for Pfizer employees, they actually might be good news for Covance and other drug-development service providers, such as Pharmaceutical Product Development (NASDAQ:PPDI). Now more than ever, major drug makers are grappling with how to do more with less, and outsourcing to companies like Covance might help them do so.
Admittedly, Covance's stock has enjoyed a pretty spectacular run -- the shares are up 66% in the past two years. Still, the firm's latest quarterly report and recent trends in the pharmaceutical industry indicate that winds are still blowing very much in Covance's favor.
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Fool contributor Brian Gorman does not own shares in any of the companies mentioned. The Fool has a disclosure policy.
