Written 17 April 2008. Consult 'Investment Approach' tab for outline of what criteria gets a firm on the research list).

80/100 on a quantitative, 2007-over-2006 recorded accounts basis. Qualitatively, a well-liked and followed company recognised as a growth stock in the flourishing clinical research sub sector. Its latest 10k outlines the main risks its operations face - and with a beta greater than 2 potential buyers should question whether now is an opportune moment to purchase those risks. Despite excellent 2007 results the equity is 20% below its 16 January 2008 all-time high and, belying its health care classification, behaving like a cyclical. History shows it especially vulnerable to the combination of client concentration and contract cancellation risk – both functions of macro economic strength.

There is plenty to like about Kendle. It is still run by its husband and wife founders of whom Candace Kendle is by training a professor of paediatrics; and Christopher Bergen a MBA also from a health care background. It has a strong record of cash generation; good earnings quality; and persistent, if not growing, margins. A transcript of its last conference call is here and is a useful primer for the 2008 outlook and strategy.

Yet for a serial acquirer with over a decade of quoted existence some of the grittier parts of financial management are disappointing – ROA and cash collection look particularly patchy. Possibly part of this is due to founder management learning on the job; and perhaps relatively new but experienced hires (finance, global clinical development and early clinical development chiefs) may spur steady improvements. One hopes so because with the major purchase in 2006 of some of rival Charles River’s operations long-term debt has never been so high nor short-term liquidity so tight.

With that in mind there is a further point that sticks out of the numbers. In the terrible equity atmosphere of 2002 Kendle was forced to recognise a $67.7m goodwill impairment (from a total of $89.7m) triggered by the 60% collapse of its market cap (10K here). That entry reduced the long-term asset base by almost 80% and shareholder equity by almost a third. When long-term debt is 11% of total assets, as it was in 2002, that’s a significant setback. But were it to happen with $230m of goodwill - or 46% of total assets - and long-term debt sitting at $200m (as it is now) it would be catastrophic.

Kendle looks a better than average potential investment with excellent cash generation and deserves to be watched. But buying its current leverage, risk and volatility profile in a poor visibility macro economic environment would be brave.

Exhibit: Kendle International, Inc tear sheet

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