In Its Best Year Since Going Public, Q4 A Catalyst For Catalent

Reviewing the fiscal year fourth-quarter results of Catalent Inc CTLT, the sell side exuded optimism concerning the company. Bank of America Merrill Lynch said the company has had a strong finish to its best year since IPOing, while Wells Fargo Securities said momentum at the company continues.

Accordingly, BofA Merrill Lynch reiterated its Buy rating on the shares of Catalent and raised its price objective from $38 to $40. The firm attributed its rating action on strong CDMO market fundamentals and the company's improved execution. At the same time, Wells Fargo maintains its Outperform rating and lifted its price target from $30 to $39.

The shares of Catalent were soaring 12.90 percent to $39.92 at last check.

Beats All Around In FQ4

Catalent, a drug delivery technology provider, reported fourth-quarter revenues of $617 million, up 16 percent year-over-year and ahead of the consensus estimate of $547 million. Adjusted EBITDA of $159 million also surpassed expectations and adjusted earnings of $0.65 per share compared to the 57 cents per share consensus estimate.

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Potential Upside Likely Relative To Sales

BofA Merrill Lynch analysts Derik de Bruin, Juan Avendano, Anne Edelstein and Michael Ryskin said the sales growth was led by double-digit organic sales growth in the Clinical Supply Services and Drug Delivery Solutions segments and double-digit contribution from Accucaps.

Wells Fargo also concurred with this, with the firm noting that within the DSS segment, biologics continued to perform strongly. The segment benefiting from some mix in U.S. oral delivery and injectables.

On the guidance, BofA Merrill Lynch said it thinks Catalent's initial 2018 guidance was prudent. That said, the firm sees upside potential relative to sales from better core growth, better performance of recent deals and forex tailwinds.

For 2018, the firm modeled flat EBITDA year over year, based on recent performance, with modest SG&A leverage offset by gross margin compression, given recent product mix trends.

Based on better fourth quarter results and the company's initial 2018 guidance, BofA Merrill Lynch increased its estimates.

The firm now expects adjusted earnings per share of $1.62 for 2018 and $1.76 for 2019.

Execution And Solid Performance Earned A Richer Multiple

Wells Fargo's Tim Evans said Catalent's string of consistent execution and solid performance has earned the company's stock a richer multiple.

"With scarcity value in the contract manufacturing sector and the everpresent possibility of consolidation, we aren't too worried about the multiple collapsing (as long as solid performance continues), but we also wouldn't anticipate multiple expansion," Evans said.

That said, Wells Fargo said it remains focused on the possibility for continued upward earnings revisions. The firm feels the company's guidance is somewhat conservative on several fronts such as acquisition revenue, forex and even core growth.