Wed: Given Imaging - dream and reality The difference between Given Imaging at $42 and at $16 is the difference between two kinds of investor.
Shlomo Greenberg 2 Aug 06 16:42
I am returning to Given Imaging Ltd. (Nasdaq: GIVN; TASE: GIVN) today. I believe that the chances that this company will continue to succeed on Main Street are better than they seemed over the past year. However, IDB Holding Corp. Ltd. (TASE:IDBH) chairman Nochi Dankner’s chances of emerging pleased and covering the second investment by IDB subsidiary Elran Investments Ltd. (TASE: ELIN) in the Yokne’am based medical device company, depends on the capriciousness of Wall Street. There, patience and a lot of luck are needed. What will happen to Given Imaging’s share is linked to the differences between two different kinds of investors who think in different ways. I will begin on a slightly pessimistic note. Stocks like Given Imaging do not usually recover to their initial sky-high peaks achieved thanks to the dreams of investors. In order for the share to gather the power to reach and exceed its earlier record, it will have to do much more than make a profit; it will have to meticulously plan its moves on Wall Street, but that’s not as hard as it sounds.
On Monday, “Globes” published an interview with Given Imaging CFO Yuval Yanai, a man with a wealth of experience and a lot of mileage on Wall Street. His experience with Wall Street and its investors is a huge asset for the company, which is trying to present a particular picture to investors. In the interview, Yanai, who was appointed to his post in September 2005, said a number of things to which attention ought to be paid. I’ll begin with his assertion, “It should be remembered that it’s difficult for a company like ours to provide quarterly guidance. We have no orders backlog and there’s volatility, so, regrettably, it’s possible to crash sometimes.”
It is possible to understand from reading various analysts’ reports since the publication of Given Imaging’s latest financials that, despite the difficulties Yanai mentions, the company continues to publish guidance. The question is, why do so? Yanai knows well what he justifiably calls “investors’ disappointment”.
It should be clearly understood that Given Imaging’s share didn’t fall from $42 to $16 because of disappointed investors, but because of a temporary bursting of a dream, and there’s a difference between the two things. Investors’ disappointment refers to Main Street, whereas disappointment from the dream refers to Wall Street.
It must be understood that a share reaches dream values because of a certain kind of investor. People who invested in Given Imaging at $40 are not the people investing in the company today. The investors back then will again invest in the company only if they believe that the dream will be renewed or if a new one emerges. Today’s investors are different; they are value investors.
Given Imaging did not pioneer investor disappointment or bursting a dream. In recent years, we’ve been witness to Elan Corp. plc (NYSE; Dublin: ELN; LSE: ELA) and the implosion of its Tysabri dream, and the story of ImClone Systems Inc. (Nasdaq: IMCL) and its Erbitux dream. Shares like Given Imaging, Elan, and Imclone peak long before the company’s sales and profit forecasts face a reality check. The gap that is created over time between the dreamy forecasts and reality causes the first drop in the share from its dream levels. This process is quite common among growth companies during their first days on Wall Street.
After the dream period ends, and after the consequent fall in the share, two trends can develop. One possibility is that the share continues to slide; the other is that the share begins to recover. History also demonstrates that recovery in cases of this kind (especially in dream fields such as medicine, biotechnology, genomics, etc.) will not restore a share to its dream level of the first cycle, unless new dreams are created, greater than the original one. If a company is able to achieve sales in line with forecasts during the dream period (as is the case with Given Imaging, for example), the share rises from its low point, but the rise is subject to economic values, not dreams. The reason is that, at this stage, dream investors have been replaced by value investors.
The new value investors measure value using the regular models and p/e ratios. Value investors, who buy a share after it fell, never looked at Given Imaging at $42 or ImClone at $88. They discover these shares only after they have plummeted two-thirds or more in price. In contrast, dream investors have abandoned Given Imaging, and won’t return, unless they feel that the company’s new capsule endoscope for the large intestine is nearing Main Street.
In other words, if Yanai is right, and the capsule for the large intestine is approved and launched in 2007, I have no doubt that Given Imaging’s share will again reach $42 or even higher, because the market for large intestine diagnostics is several times larger than small intestine diagnostics, which carried Given Imaging to $42.
Since every analyst well understands Given Imaging’s potential, the question is why is everyone so hesitant when they talk about the company today? All the analysts at CIBC World Markets, Merrill Lynch and the other investment houses I’ve seen agree that Given Imaging will barely make money in 2006, if it does at all. They are all sure that it will report a great leap in profits in 2007.
CIBC predicts that Given Imaging’s earnings per share will jump from $0.05 in 2006 to $0.36 in 2007. Merrill Lynch claims that the company will go from a loss per share of $0.19 in 2006 to earnings per share of $0.30 in 2007 and $0.80 in 2008. These numbers ought to push the share upwards, but it is still stagnating. Why? Because, on the basis of what is known now, value investors believe that the share is too expensive for their taste, whereas growth investors are still outside.
On the basis of analysts’ reports, they too are skeptical. On one hand, they write about Given Imaging’s capsule endoscope for the large intestine, but they remain cautious on the other. This is precisely why I think that this is a good time to begin buying shares, because I believe that the company will overcome all its problems, and its capsule for the large intestine will be launched next year - and then, the sky’s the limit. Do I recommend Given Imaging? For people who believe that the new capsule will be launched next year - absolutely.
Published by Globes [online], Israel business news - www.globes.co.il - on August 2, 2006
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