Under-Promising and Over-Delivering: Why Allergan Is a Buy

LOIC VENANCE/AFP/Getty Images

LOIC VENANCE/AFP/Getty Images

Allergan Inc. (NYSE:AGN) has been one of the best pharmaceutical/biotech names for growth in the last two years rising some 98 percent in that time frame. The company is involved in selling several different healthcare products that it discovers, develops, and commercializes pharmaceutical, biological, medical device, and over-the-counter products for the ophthalmic, neurological, medical aesthetics, medical dermatology, breast aesthetics, urological, and other specialty markets. It operates in two segments: Specialty Pharmaceuticals and Medical Devices.

The Specialty Pharmaceuticals segment produces a range of pharmaceutical products, including ophthalmic products for dry eye, glaucoma, inflammation, infection, allergy, and retinal disease. It also markets Botox for certain therapeutic and aesthetic indications as well as skin care products for acne, psoriasis, eyelash growth, and other prescription and physician-dispensed skin care products; and urologics products.

The Medical Devices segment offers a range of medical devices, such as breast implants for augmentation, revision, and reconstructive surgery, as well as tissue expanders. The company sells its products to drug wholesalers, independent and chain drug stores, pharmacies, commercial optical chains, opticians, mass merchandisers, food stores, hospitals, group purchasing organizations, integrated direct hospital networks, ambulatory surgery centers, government purchasing agencies, and medical practitioners. It focuses on eye care professionals, neurologists, physiatrists, dermatologists, plastic and reconstructive surgeons, aesthetic specialty physicians, urologists, and general practitioners to makes sales. Given that it has high demand products and solid management, the company continues to absolutely deliver.

In its most recent quarter, Allergan saw $1.37 diluted earnings per share attributable to stockholders compared to $1.17 diluted earnings per share attributable to stockholders for the second-quarter of 2013. That is some serious growth for such a large company. These earnings also beat analyst consensus estimates. Allergan reported $1.51 non-GAAP diluted earnings per share attributable to stockholders compared to $1.22 non-GAAP diluted earnings per share attributable to stockholders for the second quarter of 2013, a 23.8 percent increase. These numbers came from tremendous revenues.

Allergan reported $1.827 billion total product net sales in the quarter. There were increases compared to last year across the board. Total product net sales increased 15.9 percent compared to total product net sales last year during the comparable quarter. Total specialty pharmaceuticals net sales increased 13.2 percent, or 13.7 percent on a constant currency basis, compared to total specialty pharmaceuticals net sales in the second-quarter of 2013. Total core medical devices net sales increased 25.8 percent, or 26.1 percent on a constant currency basis, compared to total core medical devices net sales in the second-quarter of 2013. Total specialty pharmaceuticals and core medical devices net sales also increased 15.1 percent, or 15.5 percent on a constant currency basis, compared to total specialty pharmaceuticals and core medical devices net sales in the second-quarter of 2013. It was an all-around strong quarter.

Further, Allergan also announced that its Board of Directors declared a second-quarter dividend of $0.05 per share, payable on September 5, 2014 to stockholders of record on August 15, 2014. Not only does this stock offer growth, it pays a small dividend while waiting for the growth to be delivered. David E.I. Pyott, Allergan’s Chair of the Board and Chief Executive Officer, stated:

“With continuing strong momentum, Allergan recorded the strongest increase in absolute dollar sales in any quarter in our history, and again delivered sales and earnings per share growth above the high end of our expectations. Furthermore, we are pleased with the progression of key clinical programs into Phase 3 as well as the recent FDA approval of OZURDEX® for Diabetic Macular Edema.”

Looking ahead, I see continued momentum for Allergan. Total product net sales for the year should be between $6.9 billion and $7.06 billion. Total specialty pharmaceuticals net sales will be between $5.865 billion and $5.975 billion while total core medical devices net sales will be between $1.01 billion and $1.05 billion. Coupled with anticipated expenses, the company sees non-GAAP diluted earnings per share attributable to stockholders coming in between $5.74 and $5.80. But Allergan has a history of under-promising and over-delivering. I see no reason that this would change now. To be fair, the stock could come down hard if the company missed earnings, given it trades well above the average in this sector on a price-to-earnings basis. However, with the pipeline and deals the company has in place coupled with the management team working to improve the business, I do not foresee this occurring.

Disclosure: Christopher F. Davis holds no position in Allergan and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $193 price target.

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