Monday, August 24, 2009

PAREXEL International (NASDAQ:PRXL): Upgraded at Barclays

Barclays Capital is upgrading the shares of PAREXEL International (NASDAQ:PRXL):

We are upgrading shares of PRXL today to 1-Overweight and raising our price target from $11 to $17. We are adjusting our FY10 estimates (Parexel is on a June fiscal year), although this is largely to reflect the change in revenue recognition for the acquired Clinphone business that the company announced with F4Q results two weeks ago. This disclosure unnerved investors and helped drive the shares down 10% from last week and more than 21% from its recent highs; this compares to the Russell 2000’s up 2% and 3% over those same corresponding time periods. The abrupt shift in the accounting treatment for IVRS contracts (the majority if Clinphone revenues) was obviously unexpected and raised some concerns about management since this change is coming more than twelve months after the Clinphone acquisition closed. Still, we don’t believe there was any sleight at hand and this was simply a case of sloppy execution.

The effect of the accounting change is to defer earnings out of this fiscal year into FY11 and mask the underlying strength of the business which continues to grow and generate cash for the company. More significantly, we believe that Parexel’s global footprint is becoming increasingly important to clients and is a competitive advantage in winning new business. While Parexel’s new orders have been pressure in recent quarters, as the entire CRO industry has, Parexel’s bookings have held up reasonably well, and certainly better than PPD. We expect trial starts to pick up next year, and by extension demand for clinical trial services, given the fact that with few starts this year and obviously some clinical trials concluding, budgets will be able to accommodate more new trials. We recognize some timing risk regarding our upgrade on the eve of the expected Pfizer/Wyeth and Merck/Schering Plough mergers, but we see greater risk of missing a window of opportunity as investors seek out "recovery stories" as well as limited downside at the current valuation. Our new $17 price target represents 16x our new CY10 estimate of $1.04.

Action: It is relatively quiet today and not many calls to choose from. While this call lacks any near-term catalysts and is rather based on leap of faith, it does clarify some confusion regarding revenue recognition for the Clinphone business. I also kind of like the chart, it looks like breaking the recent range could bring on technically oriented traders targeting $14. Not saying it goes there today, but wouldn't surprise me if it does.

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