Yet again, flu vaccine maker Chiron (NASDAQ:CHIR) has thrust itself into the forefront of the news. This time it has done so by restating its financial results that it had released just a little more than a month ago, dialing back income from continuing operations by $0.04 a share for the year. It had warned at the end of last month it would have to restate its earnings some $0.02 to $0.08, and the company made good on its promise.
Additionally, and as part of its Sarbanes-Oxley review, Chiron found three areas of "material weakness" in its internal accounting controls, including its vaccine revenue recognition policies, errors in its tax account booking entries, and reporting of legal expense accruals. But just to make sure all the bad news was put out in one press release, it also noted that the president of its vaccine division, the one at the center of the company's debacle last year, had resigned. So upset was the company with this division's performance and handling of the fiasco with British and U.S. authorities that it could only allow him to depart with a $1.7 million severance package. Take that!
While shareholders may wonder whether paying million-dollar severance packages to someone who presided over the chaos surrounding the loss of half of this country's flu vaccine, the tarnishing of the company's reputation, and the loss of $1.3 billion in market value, they may further wonder whether the shares they're holding aren't ripe for a further fall.
Chiron currently sports a $7.1 billion market cap that trades at a ridiculous 122 times earnings or about three times its average over the past decade. Investors are holding onto some pretty pricey shares that are poised to tumble if the company does not execute perfectly. Considering its recent spate of luck, and the specter of SEC investigations and shareholder class action lawsuits, one might think it best to cut one's losses and run, or should anyone be sitting on a profit, take it and be glad to be out.
There is a contrarian streak in me that likes to look upon beaten-down stocks as opportunities to find potential outsized returns. When Merck (NYSE:MRK) was battered and then beaten again over Vioxx, I moved in and scooped up some shares, though it's too early to tell whether the 13% gain I'm sitting on will hold. So too with Goodyear Tire (NYSE:GT), another beaten-down prospect that had been abandoned by Wall Street because of a multitude of problems, not least of which was the prospect of bankruptcy. My gains of 50% so far show that investors can still make decent returns on what appear to be bedraggled companies.
Yet Chiron doesn't fit that profile for me. Its multiple would be more in line for a growth stock company with blue skies and green grass before it and not the gray storm clouds of probes and litigation. Even in the face of upbeat management guidance for 2005 and optimistic analyst projections for vaccine production, I see the company as way overvalued.
Chiron estimates non-vaccine-related revenues will increase at most to the high single digits, and analysts suggest the company can produce at most 35 million vaccine doses this year now that it has gotten clearance from British regulators to fire up the factory again; yet that's still some 25% less than it had been scheduled to deliver in 2004. With everything falling in Chiron's favor, I can only project revenues that still fall short of $2 billion. Considering lower than usual margins and a stable share base, I see Chiron as overvalued by half, sporting an earnings multiple twice as rich as historical levels.
This is going to be a trying year for Chiron, and a lot will hinge on how well its vaccine will be received. Distributors may be looking to diversify their supply lines, and it still faces FDA scrutiny let alone the SEC and the courts. It's not a bad company, and it has a lot of other products and services other than flu vaccines to offer the public and investors. It's just that Chiron has not yet reached its nadir, and that spells trouble and pain for investors.
Read more about Chiron's fevered results for the past year:
- Chiron's Earnings Ills
- Chiron Back From the Dead
- Chiron Probe Goes Formal
- Chiron Sneezes, Investors Catch Cold
Fool contributor Rich Duprey felt at his nadir when he could not find a Krispy Kreme doughnut shop. He owns shares of Merck and Goodyear but does not own any of the other stocks mentioned in the article.
