Thursday, 17 March 2005

Trading Below Net Current Asset Value:
Discovery Partners
Ticker: DPII
Price: $3.36
P/E: 20.94
Market Cap: $87.8 million
Net Current Asset Value: $92.7 million
Average daily volume: 80000

It’s been awhile since our report featured a company trading below its NCAV, so this week, it’s back to our roots, back to the original purpose of this site.

Discovery Partners is a small, San Diego based company which specializes in products and services that help pharmaceutical and biopharmaceutical companies in the drug discovery process. For more information, the following is from the companies 10K.

“Despite numerous technological advances in combinatorial chemistry, high throughput screening, genomics and proteomics, the process of drug discovery remains slow, expensive and often unsuccessful. In order to make the drug discovery process faster, less expensive and more likely to generate a drug candidate, we offer products and services such as assays, synthesis automation, design and synthesis of proprietary libraries of compounds, high throughput screening, lead optimization, drug discovery informatics and toxicology. These products and services can be provided individually or as an integrated solution, depending on our customers’ requirements.”

(Ten cents to anyone who can tell me exactly what that means…I’m a numbers guy)

In any event this company was recently identified as a profitable company trading below NCAV. Finding a company trading below NCAV that isn’t profitable is relatively easy. Those that are simultaneously generating a profit are few and far between.

The numbers
Fiscal year 2004 sales were $51.6 million, up 3.5 percent from 2003’s $49.8 million. Net income was $3.9 million in 2004, up 268% to 3.9 million, from $1.06 in 2003. Net profit margin for 2004 was 7.6 percent in 2004. Not too shabby for a sub NCAV company.

The balance sheet
Here’s where the story gets interesting. As of 12/31/04, the company had a rock-solid balance sheet with $80 million in cash and marketable securities, and no debt. That’s $3.23 per share in cash: this at a time when the stock trades at $3.39 per share. Theoretically to a buyer, that’s like getting the business for $.16!

The NCAV Calculation (in millions)
Current Market Cap: $87.8
Current Assets: $99.9
Current Liabilities: $7.1
Long Term Liabilities (deferred rent) .16
Net Current Asset Value: $92.7
NCAV/Market Cap: 1.06 (times)

The Street/Institutional ownership
Currently, just one analyst is covering this company. There is however, a great deal of institutional ownership. Heartland Advisors, Royce & Associates, and William Blair and Co each hold about 12 percent. While Strong Capital Management and Wells Fargo each hold about 10 percent. Dimensional Fund Advisors holds about 6 percent. Several others own 3 percent or less.

The company has been cautious on 2005 numbers, suggesting a less than stellar year. Also, the contract with Pfizer (which represented more than 50% of revenue in 2004) will be expiring. Will it be renewed?

Yet another one to keep your eye on. Its very hard to ignore the sizable amount of cash and marketable securities on this company’s balance sheet. The big question is, will the profits continue? For the theoretical price of $.16 cents per share, it may be worth a shot.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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