Why Cubist Pharma Shares Rallied

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While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Cubist Pharmaceuticals popped 3% today after Mizuho Securities upgraded the biotechnology company from "neutral" to "buy."

So what: Along with the upgrade, analyst Mario Corso raised his price target on the stock to $77 (from $50), representing about 54% worth of upside to yesterday's close. While bargain hunters might be turned off by the stock's red-hot run in 2013, Corso's valuation work -- which now includes Cubist's pending acquisitions of Optimer Pharmaceuticals and Trius Therapeutics -- suggests that the risk/reward trade-off is still very appealing.

Now what: Using a discounted cash flow model, Mizuho valued Cubist at $77, $96, and $51 in three different revenue/EPS scenarios.

"Catalysts for achieving our price target are the transactions closing/integration by year end 2013, CBST financial guidance in early 2014, CXA-201 Phase III data by year end, and FDA approval of tedizolid toward mid-2014," Mizuho noted.

With Cubist shares up about 65% from its 52-week lows, and trading at a forward P/E of 34, however, I'd wait for a wider margin of safety before betting on those catalysts. 

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The article Why Cubist Pharma Shares Rallied originally appeared on Fool.com.

Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends Cubist Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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