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STOCKS
Blooming Bargains
(Page 2 of 3)
by Jeffrey R. Kosnett
Storage supplier
The latest survey of chief information officers in CIO Magazine ranks storage systems second only to security software as corporate America's top priority for technology spending in 2005. Analyst Mark Kelleher of Adams Harkness, a Boston securities firm, sees "an overwhelming need for new capacity to store all the data" that companies continuously collect and generate.
Enter Brocade Communications Systems (BRCD). Brocade doesn't sell to individuals but rather to the likes of IBM and Hewlett-Packard. Its devices and software allow large organizations to store and manage data throughout their enterprises.
Profits sagged for several years following the Y2K spending orgy, but Brocade has now reported higher quarter-to-quarter sales for seven straight quarters. The San Jose, Cal., company has introduced new products, consolidated production facilities in China, reduced its suppliers, and moved software development to India.
All of these changes are contributing to a hefty jump in profits. Analysts see the company earning 31 cents per share in the fiscal year ending next October. That's up from 19 cents in the October 2004 year and would surpass the record profits amassed in 2000. The stock, at $7, sells for 23 times the year-ahead earnings estimate. That's not cheap, but Kelleher thinks that, over time, all of the storage companies, including Brocade, will grow fast enough to support a high P/E. The $134 that the stock hit during the nuttiness of 2000 is a distant memory, but $15 to $20 within a few years is possible.
Delivery hope
Small drug companies with a dream but no money are a dime a dozen: One share is as likely to end up worth a dime as a dozen bucks. Take Depomed (DEPO). The Menlo Park, Cal., company sold nothing in 2004 -- the third straight year it lost $29 million or more. If things don't break the right way for the company, it could run out of cash by September.
The breakthrough would be government approval to sell a new kind of extended-release tablet that enables you to take a medication once a day without side effects. Depomed calls it the Gastric Retention System. "You increase the amount of drug that goes into the body without getting sick to your stomach," explains CEO John Fara, an alumnus of several successful drug companies.
Winning Food and Drug Administration approval isn't easy. But Depomed isn't inventing new drugs. Its plan is to repackage common generic medicines and sell them by promoting their enhanced comfort and convenience. Depomed's first products -- Glumetza, for what's known as Type 2 diabetes, and Proquin, for urinary tract infections--are past the three stages of clinical trials that all drugs must go through to earn an FDA okay.
Assuming the FDA doesn't delay or kill the application, the sales and earnings projections are anyone's guess. Thomas Weisel Partners, which does investment banking for Depomed, sees sales of $56 million and earnings of 80 cents a share in 2006, the first full year Depomed would have significant revenues. Those numbers are from an interested party, so you can take them or leave them. But 12 million Americans have been diagnosed with Type 2 diabetes. Fara says that if Depomed can sell to 5% of diabetics and win the same share of patients with other chronic illnesses, Depomed will be highly profitable. This risky stock, selling for $5, is worth a shot.
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