Some research discards – PDII

PDI, Inc. (Nasdaq: PDII) is a contract pharmaceutical marketing corporation. They managed to make it past my initial screen and I did some subsequent research. On initial glance, it does appear to be relatively cheap from a valuation perspective (revenues in relation to enterprise value is quite inexpensive), but the corporation suffers from significant customer concentration and they are strategically diversifying into partnering with diagnostic companies which creates a different element of investment risk – and valuing these risks from an external investor perspective adds even further complexity.

I generally do not like customer concentration and will pass on this, but will leave this for more enterprising readers out there to figure out if there is value here – my hunch is that the computer traders out there are looking at the low enterprise value in relation to other valuation metrics ($24 million vs. $75 million market cap, and $150 million revenues over the past 12 months), but are not paying enough attention on tangible book ($2.27/share) which means the downside risk is a bit lower (clarification, added December 24, 2013: downside risk referring to a lower price floor) than one would intuitively think.

In other words, without projecting some future external factors out there that would lead to ‘big pharma’ engaging firms such as these, or any intuition that these investments in diagnostics will succeed (there is no way of knowing), PDII is a pass on my books.

2 thoughts on “Some research discards – PDII”

  1. Not related to this stock but post here as comments to Pinetree Capital is closed. The debt looks interesting on paper. But there are quite a few related party transaction (Augusta Industries) where basically Pinetree agrees to buy $X of Augusta Industries shares and Augusta Industries would buy $X of Pinetree capital shares – this type of transaction also happened at the beginning of the year. I find that quite troubling. I’m no accounting expert, but would this kind of financial engineering help it cure the debt-equity ratio mathematically while in reality, leaves the company in better shape financially.

  2. I see I switched comments to close 28 days after posting of an article, I believe I did that to limit spam bots. I’ve changed that to 180 days.

    About Pinetree and the reciprocal arrangement, yes, what you are illustrating is clearly fishy and financial engineering, but Pinetree management will have to figure out some way of converting their end of the equity into cash because the noose is still tightening in June. Reciprocal equity arrangements won’t work when the things you invest in still crater in price (e.g. Pinetree has already managed to lose 50% on their Augusta investment a day after they announced it and they haven’t even formally done the exchange yet – continuing to demonstrate the unique ability of Pinetree’s management acumen).

    Since Pinetree’s net asset value is still significantly above market price, I can see management’s reluctance to do a secondary offering, but that’s what they deserve when the whole stock market knows they aren’t exactly there to deliver shareholder value. If management actually believed in themselves they would start buying millions of their own shares off the open market, but clearly this is not happening.

    Eventually the endgame for them is likely some asset-rich entity that wants to harvest a bazillion dollars of capital loss room will take them out for a fraction of that tax asset value. This is one of those classic “cigar butt on the ground you can take one last puff before throwing away” opportunities.

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