Is Forest Laboratories a Buy Now?

With shares of Forest Laboratories (NYSE:FRX) trading at around $37.59, is FRX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Forest Laboratories failed to meet expectations. This would often mean a good reason to sell. However, in some cases, it presents a buying opportunity. Is this one of those cases? Let’s take a look.

http://wallstcheatsheet.wpengine.netdna-cdn.com/wp-content/uploads/2013/01/FRX1-e1358186902301.png

Forest Laboratories is trading all over the map today. It’s obvious that investors aren’t sure what to make of the situation. On one hand, short-term results were bad, which leads to weakness in the stock price. On the other hand, there is little doubt that Forest Laboratories is a long-term success story. Therefore, a lot should depend on your trading or investing goals.

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As for the results reported earlier this morning, revenue dropped to $722.70 million from $1.21 billion. The primary reason for this was the loss of patent exclusivity on Lexapro. In regards to earnings, the GAAP loss per share was $0.58, and the non-GAAP loss per share was $0.21.

Overall, there was a big drop in sales, but some drugs still performed well. What is most important is the company’s utmost confidence in recently launched drugs, Tudorza and Linzess.

Let’s take a look at the bigger picture for Forest Laboratories.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio and balance sheet for Forest Laboratories are both perfect. Forest Laboratories might not be looked at as an acquisition target because of its size, but any kind of deal is possible when there is strong potential and an impeccable balance sheet.  

Debt-To-Equity

Cash

Long-Term Debt

FRX

0.00

$2.12 Billion

$0

IRWD

0.00

$193.32 Million

$0.36 Million

NVO

0.03

$2.97 Billion

$183.39 Million

 

T = Technicals on the Stock Chart Are Strong

Forest Laboratories has performed well over the past three years. We didn’t see extraordinary gains, but it’s better than a loss. Novo Nordisk (NYSE:NVO) was the strongest performer in this group over the past three years, and Ironwood Pharmaceuticals (NASDAQ:IRWD) delivered the weakest performance.

1 Month

Year-To-Date

1 Year

3 Year

FRX

5.29%

6.43%

21.65%

19.90%

IRWD

36.99%

33.03%

21.82%

0.20%

NVO

6.76%

6.67%

52.41%

165.40%

 

At $37.59, Forest Laboratories is currently trading above all its averages.

50-Day SMA

34.84

100-Day SMA

35.10

200-Day SMA

34.69

 

E = Earnings and Revenue Have Been Steady

Revenue has been improving consistently on an annual basis. Earnings have been more unpredictable, but solid.

2008

2009

2010

2011

2012

Revenue ($)in billions

3.84

3.92

4.19

4.42

4.59

Diluted EPS ($)

3.06

2.52

2.25

3.59

3.57

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

1.17

1.21

1.06

821.13M

760.64M

Diluted EPS ($)

0.91

1.04

0.72

0.21

0.08

 

T = Trends Might Support the Industry

This industry is nearly impossible to predict. Just when it looks as though the FDA will be more lenient, they surprise everyone by not approving a drug that many people many need for a chance at survival. In other cases, the FDA will approve a drug that isn’t expected to have a chance. Trends might support the industry because it has turned into a crapshoot.

Conclusion

As stated earlier, the long-term story for Forest Laboratories is likely a good one. If you’re ever concerned, just take a look at the balance sheet. It can act as a reminder that there is plenty of time and money for more drugs in the pipeline. Losing exclusivity on Lexapro was a big hit, but that has now been priced into the stock price.

Forest Laboratories is far from a one-trick pony like so many companies in this industry. There will be disappointments, and there will be home runs. In the end, the good will outweigh the bad.

As long as the market stays afloat, Forest Laboratories is a long-term OUTPERFORM.

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