Does Dendreon Still Have Potential?

With shares of Dendreon Corp. (NASDAQ:DNDN) trading at around $3.91, is DNDN an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Dendreon recently missed big on earnings. Analysts expected -$0.48 on $79.6 million in revenue. Q1 came in at -$0.48 on $67.6 million in revenue.

Dendreon management has stated that it expects the full benefits of its restructuring plan to be realized in the third quarter. At this time, there should be a significant decline in expenses. If this turns out to be accurate, it will help, but what about growth? Revenue has been awful. This has a lot to do with increased competition. Johnson & Johnson’s (NYSE:JNJ) ZYTIGA has been approved by the FDA, and Medivation’s (NASDAQ:MDVN) Xtandi has been approved by regulators. Furthermore, there are many doctors that question the effectiveness of Provenge when compared to chemotherapy.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Sticking with the negative theme (for now), it looks as though management hasn’t improved much. According to Glassdoor.com, employees have rated their employer a 2.6 of 5, which is subpar. Only 16 percent of employees would recommend the company to a friend. This isn’t only dismal, it’s the worst that has ever been seen while researching for this column. In addition to those poor numbers, only 40 percent of employees approve of CEO John H. Johnson. The employee consensus is that the company looked to grow too fast, and that there is no direction or leadership. Not exactly a team a wise investor would want to be backing. The following is a comment from an employee: “In the past three years several products have been implemented and decommissioned. There is no thinking through what is really needed.” That pretty much sums it up.

Finding good news for Dendreon is like trying to find something of value with a metal detector on the beach. It’s difficult to find, but it’s there. Gross margins have increased to 35.83 percent from 26.85 percent, operating costs are down to $82.85 million from $112.53 million, and management states that the company is slowly recovering from a poor first quarter. Management expects Q2 revenue in the mid-$70 million area.

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Weak

Dendreon has lost almost 92 percent of its value over the past three years. Imagine your favorite football team losing every game for three consecutive seasons. Yeah, it’s that bad of a performance.

1 Month Year-To-Date 1 Year 3 Year
DNDN -16.41% -26.84% -57.28% -91.48%
JNJ 4.13% 23.89% 38.75% 48.29%
MDVN -1.40% 3.59% 27.71% 873.3%

At $3.91, Dendreon is trading below its averages.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!
50-Day SMA 4.55
200-Day SMA 5.14

E = Earnings Are Weak

That’s a lot of red ink. Enough said.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in billions 0.000 0.000 0.048 0.342 0.326
Diluted EPS ($) -0.79 -2.04 -3.18 -2.31 -2.65

When we look at the last quarter on a year-over-year basis, we see a decline in revenue, but a narrowed loss.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec 31, 2012 Mar. 31, 2012
Revenue ($) in billions 0.082 0.080 0.078 0.085 0.067
Diluted EPS ($) -0.70 -0.65 -1.04 -0.2584 -0.48
NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Conclusion

Dendreon is suffering from lower product sales, which is due to increased competition. Costs are too high, and the company culture is awful. On the other hand, Dendreon narrowed its loss in Q1 on a year-over-year basis, and it expects conditions to improve. While that’s an expected statement from any company that’s performing poorly, and while Dendreon currently relies heavily on Provenge, Dendreon isn’t a one-trick pony. It still has several other drugs in the pipeline. It should also be noted that Dendreon has been on the brink of disaster many times throughout its history. It has clawed its way back to life in every instance. Perhaps it has nine lives. If that’s the case, it has used up four of them so far.

For now, there is still upside potential, but it’s very high risk. It will be interesting to see if revenue improves in Q2, and if there will be a significant decline in expenses in Q3 as advertised.

For now, Dendreon is a WAIT AND SEE.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

All content posted should never be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions.