By Crista Huff, Chief Analyst, Cabot Undervalued Stocks Advisor
From Cabot Wealth Advisory 10/18/16 Sign up for Cabot Wealth Advisory—it's free!
I last recommended shares of global pharmaceutical company Allergan (AGN) on May 12, 2016 in my Cabot Wealth Advisory entitled, ”Now Undervalued, Should You Invest in Allergan (AGN)?”.
I hope you bought it!
But if you didn’t, it’s not too late. Here’s an update.
Allergan had been in the news because Pfizer’s (PFE) planned purchase of the company fell through in April, causing AGN to fall significantly. By the time we looked at AGN as a “Buy Low Opportunity” in May, the share price had stabilized, but had not yet begun its rebound.
But rebound it did. AGN proceeded to rise 21%, from 216 to a high of 261 on July 27, then commenced trading sideways—a normal occurrence after a quick run-up.
Allergan completed the $40.5 billion sale of its generic pharmaceutical business to Teva Pharmaceuticals (TEVA) in August. The company intends to use some of its $35 billion in net proceeds to pay down debt, repurchase stock and possibly seek M&A opportunities.
In early May, Allergan had announced a new $10 billion share repurchase authorization, and I mentioned that “Allergan plans to repurchase $4 billion to $5 billion of its stock over the next four to six months.” The company has since repurchased $5 billion of shares, and intends to complete the remaining $5 billion of share repurchases in 2017. Analysts are assuming an additional $2 billion per year in share repurchases and aggressive debt repayment through 2020.
The company has a strong assortment of franchise drugs (Namenda, Restasis, Botox), new launches (Vraylar, Kybella and Viberzi), and developing drugs in its pipeline.
Allergan’s treatment for minimizing fat under the chin, BELKYRA(R), received marketing approval in Sweden yesterday, opening the door for approvals throughout Europe. BELKYRA(R) has 44.6% and 48.6% success rates in Sweden and the U.S., respectively, with minimal side effects. The medical procedure involves injecting the drug into fat cells that cause “double chin,” causing the cells to die and disappear naturally.
This week, the FDA accepted Allergan’s supplemental new drug application for label expansion of Avycaz, its treatment for complicated urinary tract infections.
Wall Street consensus estimates project Allergan to earn $13.98 and $16.96 per share in 2016 and 2017, reflecting EPS growth rates of 4.1% and 21.3% (December year-end). One key Wall Street investment bank further estimates that Allergan’s EPS will grow at an average rate of 15% from 2017 through 2020, with a corresponding average PEG ratio of 1.0.
These numbers are a fraction lower than the expected 5.5% and 21.7% earnings growth rates in 2016 and 2017 that were in place when I wrote about Allergan in May. All earnings estimates on big companies fluctuate over time. The recent changes in Allergan’s earnings projections should be considered mild and inconsequential, although a pattern of repeated downward revisions in EPS numbers will typically harm share prices.
One key Wall Street investment bank projects Allergan’s revenues to grow at a compound annual rate of 7.3% over the next four years through 2020, and for gross margins to remain steady at 89% during that timeframe. However, cost reductions are expected to raise net margins from 39% this year to 46% in the year 2020.
The Stock Could Rise 50% Before Becoming Fairly Valued
The stock’s price/earnings ratios are 16.7 and 13.7 for 2016 and 2017, making the stock overvalued based on this year, but undervalued based on next year’s earnings growth. And that’s okay, because when given a disparity in annual valuations, the longer-term number is more important than the current number.
In fact, AGN could rise over 50% before the 2017 P/E would be considered fairly valued!
An example of an opposite scenario can be found in General Motors (GM). Earnings growth at GM is expected to slow from 16.1% in 2016 to -1.4% in 2017. When earnings growth grinds to a halt, there’s no impetus for people to buy the stock and drive the share price up. Conversely, when earnings growth is ramping up, as with Allergan, that news can bring new attention to a stock, causing investors to purchase the stock and propel the share price upwards.
AGN has some upside price resistance around 255, and more around 270. It’s currently bouncing at short-term price support, giving traders a 10% capital gain opportunity as the stock rises back to 255. Given a neutral-to-bullish stock market, I expect AGN to reach 255 again this year, and make additional progress in 2017.
I reiterate my statement from May, “due to the $10 billion repurchase plan, there’s very little downside remaining in the share price.” Growth stock investors should feel confident about buying AGN, with the intention of holding the stock for six to 24 months.
To receive further updates on AGN, and receive all the recommendations from my portfolio, take a trial subscription to Cabot Undervalued Stocks Advisor. Find out more here.
From Cabot Wealth Advisory August 25, 2015 Sign up for Cabot Wealth Advisory—it's free!
Low Price to Book Value Ratio is an effective yet easy ratio to calculate to determine if your stock choice is undervalued or overvalued. Simply divide the current stock price by the current book value per share. Most research services provide book value numbers for all companies. Book value represents the net assets of a company (total assets less liabilities). Price to book value ratios less than 2.00 indicates your stock is undervalued.
Allergan Corp. (AGN) provides a good example of a company with rapid sales and earnings growth selling at a low price to book value ratio. The company is a leading manufacturer of generic drugs. Allergan’s goal is to create difficult to produce off-patent drugs. Allergan (formerly Actavis) has grown rapidly in recent years by acquiring large companies within the pharmaceutical sector.
The Allergan/Actavis merger will create savings of $5.00 per share within the next 12 months. Sales will likely advance 28% and EPS will jump 21% to 19.20 in the 12 months ending June 30, 2016. AGN shares sell at just 1.76 times book value, which is very reasonable for a company in the healthcare sector. I expect AGN’s stock price to rise 26% to my Min Sell Price of 376.46 within one year. Buy AGN at the current price.
I will continue to follow AGN, as well as many other undervalued, high-quality companies in my Cabot Benjamin Graham Value Investor.
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|Allergen plc (AGN)
Morris Corporate Center III
400 Interpace Parkway
Parsippany, NJ 07054
Index Membership: N/A
Industry: Drugs - Generic
Full Time Employees: 21,600