Shares in Hikma Pharmaceuticals (LSE: HIK) have plunged by over 10% today after the company announced that it has agreed a reduced price for its acquisition of Roxane Laboratories. It will now pay $647m in cash as opposed to the $1.18bn previously agreed. Thats a reduction of $535m, with Hikma still set to issue 40m consideration shares as previously announced.
The reason for the cut price is new information received by Hikma regarding the financial performance of Roxane in 2015, which the company believes will have an impact on its outlook for 2016 and 2017. Specifically, Roxanes revenue was lower in 2015 than had been anticipated due to higher-than-expected rebates and this means that the value of the business is lower than had been previously decided.
Although the market is disappointed with the news, Hikma expects the acquisition to be strongly accretive from 2017 onwards. And with Hikma due to increase its bottom line by 16% in the current year, its price-to-earnings growth (PEG) ratio of 1.4 indicates that now could be an excellent time to buy it for the long term.
Time to buy?
Also reporting today was Electrocomponents (LSE: ECM). It recorded exceptionally strong performance in Continental Europe in the four months to 31 January 2016 and this helped to offset weakness in North America thatresulted from softness in manufacturing output. In addition, Electrocomponents UK performance stabilised somewhat and with the company on track to deliver its planned 25m cost savings for the year, its gross margin also began to stabilise when negative currency changes are excluded.
Looking ahead, Electrocomponents is forecast to increase its bottom line by 13% next year and this puts it on a PEG ratio of only 1.3. This indicates that now could be a good time to buy a slice of the business even though it faces an uncertain global economic outlook. And with Electrocomponents currently yielding 5.6%, it remains a highly enticing income play too.
Meanwhile, defence specialist QinetiQ (LSE: QQ) also released a trading update today. While its guidance has been left unchanged, it noted that the UK defence market remains uncertain. Thats at least partly because the impact of the governments Strategic Defence and Security Review is unclear, while the Single Source Regulations Office isnt expecting to publish the single source profit rate for the next financial year until March.
Despite this uncertainty, QinetiQ appears to be making encouraging progress. Its EMEA services division traded in line with expectations during the third quarter, although as with its Global Products division, theres the potential for delays and QinetiQ remains dependent on the timing and shipment of key orders.
With QinetiQ expected to increase its net profit by just 1% this year and 3% next year, its price-to-earnings (P/E) ratio of 14.2 lacks appeal. Certainly, it has a bright long-term future, but with markets being relatively cheap at the present time, there appear to be better options elsewhere.
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