Diplomat Pharmacy Analysts Weigh Takeout Scenarios, Valuation After Going Concern Warning

Diplomat Pharmacy Inc DPLO cautioned investors on Tuesday that it has "substantial doubts" related to its ability to continue functioning as a business.

Some analysts aren't ready to throw in the towel just yet — and see upside after Tuesday's all-time lows.

The Analysts

Wells Fargo analyst Jamie Stockton maintained a Market Perform rating on Diplomat with a price target lowered from $5.50 to $3.

Morgan Stanley analyst Ricky Goldwasser maintained at Equal-Weight, price target lowered from $8 to $4.

Barclays analyst Steve Valiquette downgraded from Overweight to Equal-Weight with a price target lowered from $7 to $3.

Wells Fargo's Scenarios: $1.50 Per Share Or $6.50

Diplomat's management is likely to update investors in the near-term ahead of potential violation of a debt covenant in the fourth quarter, Stockton said in a Tuesday note.

If the company opts not to sell itself and remain public, it would be valued at eight times EV/EBITDA on EBITDA estimates of $85 million, the analyst said. 

This would value the stock as low as $1.50 and assumes the debt covenant can be resolved. 

Related Link: Diplomat Pharmacy Has 'Substantial Doubt' It Can Continue Operations

On the other hand, a return back to the core specialty business — excluding infusion — would generate an EBITDA margin of around 1.5% versus its current zero, Stockton said.

This would yield a valuation of $6.50 either in a takeout scenario or if the company remains public, the analyst said. 

Morgan Stanley On A $5-Per-Share Takeout

Diplomat's strategic review process was confirmed in August, and the core business has deteriorated since then, Goldwasser said in a Wednesday note.

A potential buyer likely assumed this outcome as part of its M&A-related attrition, the analyst said. 

If Diplomat sells itself, it could be done at $5 per share based on a 12.5 times estimated 2020 infusion EBITDA of around $70 million, she said. 

The multiple is consistent with prior deals in the space, Goldwasser said. 

Encouragingly, the specialty infusion business continues to show "robust" growth and accounts for up to 90% of total 2019 profit, according to Morgan Stanley. 

Barclays: Uncertain Timing

The bullish case for Diplomat's stock was based on the thesis of the sum of its individual parts — especially the "crown jewel" specialty infusion business — being worth more than its valuation, Valiquette said in the Wednesday downgrade note.

While a strategic review could result in the sale of certain assets or the business as a whole, the timing is uncertain and the business continues to face challenges, the analyst said. 

"All told, DPLO may still be capable of creating value (vs. current valuation) from the strategic review, but there is too much risk of DPLO losing additional customers and hitting a credit crunch while this process is ongoing." 

Price Action

Diplomat shares were up 2.58% at $3.18 at the close Wednesday.