The name Covance (NYSE:CVD) might not resonate with a lot of investors. After all, the company's business as a vendor of drug development services means that it primarily acts behind the scenes in support of well-known outfits such as Pfizer (NYSE:PFE). Still, its latest earnings release provides more evidence that in the word of drug outsourcing, Covance is a name worth remembering.
The firm, based in Princeton, N.J., recently announced that first-quarter revenue climbed 15.2% to $281.3 million, while earnings jumped 30.2% to $28.9 million. Part of the company's success stems from crafting longer-term strategic agreements with pharmaceutical and biotech clients. Demand for this sort of service continues to be robust. Covance noted that immediately after opening 10 new rooms for toxicology services at its Madison, Wis., facility, a client purchased the space for dedicated capacity. Also in the quarter, the company completed an agreement for dedicated space that will come online in the next six months at its Harrogate, U.K., toxicology facility.
Covance's ability to make strides in improving its efficiency has been at least as significant a factor as demand for its services. The firm has improved its operating margin steadily over the past several quarters so that it's now at 14.5%, compared with 11.8% in the first quarter of 2003 and 13.1% in Q1 of 2004. Nor is this progress over; Covance expects to continue expanding the operating margin.
One point of potential concern is that the first-quarter order backlog grew only slightly from the fourth quarter after more robust gains in previous quarters. Still, Covance's total backlog of $1.46 billion ought to be more than enough to keep it busy for some time. While the company's valuation of 24 times 2005 earnings is a bit a rich, Covance should be on investors' radar.
For more on Covance, see:
Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
