Plus, Pfizer stubs a toe, DeVry draws undergrads, and more.
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Redback Networks RBAK announced Wednesday that it has won the second phase of a network upgrade contract with Guangdong Telecom, the largest provincial carrier of China Telecom CHA. Guangdong Telecom will deploy Redback's SmartEdge router on as many as 4 million of its 50 million customer lines. While the terms of the contract were not announced, Morningstar analyst John Slack notes that this is a major international win for Redback and is consistent with his thesis that the company is concentrating on expanding its international business. Despite Slack's concerns about quarter-to-quarter sales lumpiness and growing competitive threats, he continues to believe Redback is well positioned in one of the sweet spots of telecom spending. Given the early state of network upgrades among its customers, Slack believes Redback will continue to see strong sales growth as carriers build out their networks over the next couple of years. He's leaving his fair value estimate unchanged.
Sticking with Pfizer's Fair Value Despite R&D Setback
Pfizer's PFE decision to discontinue development of torcetrapib deals another blow to a firm already struggling to replace sales it has lost--and will lose--as a result of patent expirations. However, Morningstar analyst Heather Brilliant views the firm as more than just a compilation of drugs; she thinks Pfizer has built sustainable competitive advantages that will help it remain a pharmaceutical leader. Moreover, when Brilliant removed torcetrapib from her model, it knocked only about $1 off her fair value estimate. In essence, Brilliant thought torcetrapib had the potential to bring in $10 billion in peak sales for Pfizer, but not until 2014. Further, because the drug was still in Phase III, she had assumed a 60% probability it would eventually receive Food and Drug Administration (FDA) approval. Thus, even after taking into account the failure of torcetrapib, she's standing firm on her fair value estimate.
Solid New Enrollments for DeVry
DeVry DV reported solid new undergraduate fall enrollments Thursday. New enrollments grew 11.9%, roughly in line with Morningstar analyst Kristen Rowland's estimate. In addition, DeVry's total undergraduate enrollments rose 4.9%, the first increase in fall enrollment in several years. Solid new undergraduate start growth, which has been very encouraging over the past year, underpins Rowland's thesis and should continue to drive improvement in DeVry's profitability. Since these results align with Rowland's long-term view of the company, she is maintaining her fair value estimate.
FDC Panel Could Hurt Boston Scientific and Angiotech Pharmaceuticals
Amid mounting concerns about potentially fatal longer-term side effects from drug-eluting stents, Boston Scientific BSX, Angiotech Pharmaceuticals ANPI, and to a lesser extent Johnson & Johnson JNJ have remained under a dark cloud. The FDA has convened an expert panel to assess data suggesting that such stents can lead to life-threatening blood clots in a very small minority of patients even several years after the stent is implanted. However, Morningstar analyst Debbie Wang notes that this data is still emerging. For instance, it's not clear which patients might be more vulnerable to the development of blood clots. Further, the small but serious risk of blood clots must be weighed against the complication of reclogged arteries that require further intervention, which is the primary shortcoming of bare metal stents. All told, Wang doesn't think the panel is likely to issue any clear-cut guidelines substantially limiting the use of drug-eluting stents. Instead, she expects it to recommend further study of what sort of patients should avoid such stents and the optimal drug therapy that should be used in conjunction with these devices. For that reason, she's holding steady on her fair value estimates for all three companies.
Jeffrey Ptak, CPA, CFA, is a stock analyst with Morningstar. He does not own shares in any of the securities mentioned above.