Taro Pharmaceutical Industries (NYSE:TARO) has long been a stock that I have traded. Right now, the stock appears to be setting up for another run after a fantastic first quarter report. In the first quarter, Taro garnered net sales of $187.2 million. This is an increase of $22.0 million, or 13.3 percent over the comparable quarter a year ago. Gross profit, as a percentage of net sales was also up. It rose to 75.5 percent, compared to 72.4 percent a year ago.
This was interesting as the company pumped more money into research and development. Research and development expenses increased 7.9 percent to $13.2 million. However, as a percentage of net sales, it actually decreased from 7.4 percent to 7.0 percent year over year. Selling, marketing, general and administrative expenses, as a percentage of net sales, was 14.2 percent compared to 13.4 percent. Combining this all we see that Taro had operating income increase to $101.5 million, or 54.3 percent of net sales, compared to $63.1 million, or 38.2 percent of net sales a year ago. That is a dramatic improvement that led to diluted earnings per share of $2.10 compared to $1.10 a year ago.
Before you make any decisions based on a single quarter, it may be best to look at the entire year of performance. Well, Taro has been improving all year long. For the year ending March 31, 2014 (compared to the year ending March 31, 2013), net sales increased $88.3 million, or 13.2 percent to $759.3 million. Gross profit, as a percentage of net sales was 76.4 percent, compared to 73.7 percentfor the entire year prior. Research and development expenses increased 19.2 percent to $55.4 million or 7.3 percent of net sales compared to 6.9 percent. Selling, marketing, general and administrative expenses increased $5.3 million, however, as a percentage of net sales decreased to 12.1 percent from 12.9 percent. Operating income increased to $430.3 million, or 56.7 percent of net sales, compared to $328.6 million, or 49.0 percent of net sales and diluted earnings per share of $8.14 compared to $5.95. This is substantial improvement.
The stock has further catalysts this year as well. The company recently received approval from the U.S. Food and Drug Administration for an Abbreviated New Drug Application for Phenytoin Chewable Tablets USP, 50 mg. During the quarter, the company also filed three more Abbreviated New Drug Applications with the Food and Drug Administration. With this, Abbreviated New Drug Application represents twenty-seven products await FDA approval, of which one is tentatively approved. Thus, Taro has years of potential revenues ready to be made once FDA gives the nod. Taro will be able to reach more customers with more conditions, bringing in revenues to allow the company to further research and develop new drugs to bring to market.
Disclosure: Christopher F. Davis holds no position in Taro and but may initiate a position in the next 72 hours. He trades the stock but believes the stock is moving higher and thus current has a buy rating on the stock and a $137 price target.