Silence Isn’t Golden: Aceto Needs to Disclose Upside of of Rising Pharmceuticals Deal

Aceto Corp. (ACET) is a small chemical company that’s made a couple of mistakes lately, and it did the right thing by admitting them in an open letter to shareholders in June. But the confession did little to endear investors as they suffered through markets that were skittish for unrelated reasons. They mainly just sold.

Aceto shares are about 23% lower since the letter, accelerating share price declines that have taken Aceto’s market cap down about 40% this year to $143 million.

Aceto Corporation Price Stock Chart by YCharts

Ironically, this nosedive comes at a time when many things seem to be going right for Aceto. Despite recent flub-ups, all of its business segments are growing, and profit margins are wider than they were a year ago. YCharts Pro gives the company perfect scores for both its fundamentals and its relative share value. But management may have to do a lot more soul bearing to bring investors back to the fold in today’s climate.

Aceto specializes in selling chemicals used in pharmaceuticals, agricultural products and a few foods. The majority of sales and the biggest profits come from that health sciences division, where it mainly sells ingredients for drugs and some fully-formed generics. Until recently, post-2009 Aceto shareholders had little to complain about. The share price rose some 80% between late 2009 and early 2011. Third quarter results released in May showed nice increases in underlying sales and profits.

Aceto Corporation Revenues (TTM) Stock Chart by YCharts

But trouble was already brewing in a couple of places where the company had tried to move beyond its typical niche products in the specialty chemicals industry. As the shareholder letter outlined, its recent entry into the glyphosate market (that’s a common herbicide) didn’t go as planned because there’s a whole lot of competition there. Aceto’s essentially backing out. Similarly, it discovered that launching just one product in the pet vaccine area wasn’t going to cut it when competitors have whole lines to offer. It’s taking on a partner so it can expand.

These issues, however, are not nearly as interesting as Aceto’s $73 million acquisition in January of generic drug maker Rising Pharmaceuticals. Rising’s estimated 2010 revenues are slightly over a quarter of what Aceto’s health sciences division booked last year. Aceto used most of its cash and took on some debt in the deal, which will turn it into more of a drug manufacturer and less of an ingredient supplier.

Aceto Corporation Free Cash Flow TTM Stock Chart by YCharts

Aceto management believes the higher profit margins in drug manufacturing will boost its fortunes. The problem is, Aceto isn’t really letting investors share in the dream. Aceto management has never offered financial forecasts, and spending more than an entire year’s gross profit on an acquisition hasn’t convinced it to open up now. Rising has about 30 drugs in its pipeline that Aceto will neither describe nor ballpark for market potential. Aceto will keep Rising’s future financial results obfuscated within the broader health sciences division results “for confidential competitive reasons.”

So here’s what investors do know: Aceto has bet big on a company that will shift, at least moderately, the focus of its core business. Twice in the past year, Aceto has tried to make strategic changes in other business divisions only to be stung by the outcome. Aceto mentioned Rising only optimistically in its shareholder letter, so there’s no indication of trouble with the acquisition. But the company hasn’t given investors much reason to believe it will be a roaring success either. At the moment, Aceto shares pay investors a 3.8% dividend yield to have some faith. But in a market where few investors are in the mood to make guesses, faith may be a bit much to ask for.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.