Is Perrigo a Stealth Superstar?

With shares of Perrigo Co. (NASDAQ:PRGO) trading at around $119.47, is PRGO an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our

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C = Catalyst for the Stock’s Movement

Perrigo is trading near its 52-week high. Amateurs would look at this and shout, “Time to sell!” After all, buy low/sell high is a winner’s game, right? Not quite. Stocks making 52-week highs tend to make 52-week highs for considerable amounts of time before slowing. In most cases, an exit signal would be exhausted buying, which is evidenced by the stock trading in a tight range for several months. The only big risk in this kind of situation is surprise negative news that can lead to a gap down. The odds of this happening increase for stocks trading at high multiples. A steep market correction can also act as a catalyst.

The point here is that barring any sudden or unforeseen circumstances, winning stocks are likely to continue winning for significant periods of time. The good news for Perrigo is that buying momentum hasn’t slowed. There is still excitement, which can often act as the biggest catalyst of all. That said, there needs to be substance as well.

Let’s take a quick look at Perrigo:

  • Consumer Healthcare revenue increased 14 percent year-over-year
  • Nutritional revenue decreased 4.8 percent year-over-year
  • Rx Pharmaceuticals net sales decreased 8.3 percent year-over-year
  • Active Pharmaceutical Ingredients revenue decreased 4 percent year-over-year
  • Four consecutive quarters of positive earnings surprises
  • EPS expected to increase between 9 and 13 percent this year
  • Company expects to launch 60 pipeline products this year
  • Recent FDA approval for drug application for testosterone gel 1%
  • Recently began shipping generic version of Mucinex
  • Growth through aggressive acquisitions

The above news might seem mixed, but the stock has fought through any bad news because of future potential. One of the biggest selling points is generics, which are still in the early innings of a bull run. As far as acquisitions are concerned, Perrigo has been very active. It has acquired Velcera to strengthen its over-the-counter position in pet healthcare; it has acquired Resmont Pharmaceuticals Ltd. to strengthen its position in oral liquid formulations in the U.K.; it has acquired Paddock Labs to strengthen its position in the Rx pharmaceutical space; it has acquired Cobrek Pharmaceuticals to strengthen its position in foam-based generic prescription pharmaceuticals, and more. All these acquisitions might sound costly, but Perrigo has managed its debt well.

The chart below compares fundamentals for Perrigo, Mylan (NASDAQ:MYL), and Actavis (ACT). Perrigo has a market cap of $11.23 billion, Mylan has a market cap of $11.21 billion, and Actavis has a market cap of $12.59 billion.

PRGO

MYL

ACT

Trailing   P/E

25.41

18.64

129.58

Forward   P/E

18.18

8.83

10.87

Profit   Margin

13.58%

9.43%

1.65%

ROE

23.23%

18.74%

2.65%

Operating   Cash Flow

$522.86 Million

$949.02 Million

 $665.80 Million

Dividend   Yield

0.30%

N/A

N/A

Short   Position

3.00%

8.90

1.00%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal   

The debt-to-equity ratio for Perrigo is close to the industry average of 0.60. It’s also stronger than the debt-to-equity ratios for Mylan and Actavis.

Debt-To-Equity

Cash

Long-Term Debt

PRGO

0.66

$459.51 Million

$1.39 Billion

MYL

1.71

$409.54 Million

$5.74 Billion

ACT

1.67

$328.00 Million

$6.43 Billion

 

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T = Technicals Are Strong

Perrigo has performed well over the past several years. It has also outperformed Mylan and Actavis year-to-date. Furthermore, it yields 0.30 percent whereas Mylan and Actavis don’t offer any yield.

1 Month

Year-To-Date

1 Year

3 Year

PRGO

1.89%

14.88%

11.45%

100.00%

MYL

-7.66%

3.21%

25.88%

30.25%

ACT

8.80%

14.55%

45.49%

131.50%

 

At $119.47, Perrigo is trading above all its averages.

50-Day   SMA

115.81

100-Day   SMA

109.99

200-Day   SMA

111.74

 

E = Earnings Have Been Strong             

Revenue and earnings have consistently improved on an annual basis. This was a common trend throughout the broader market for several years, but many companies have suffered setbacks in revenue and earnings in 2012. Perrigo has bucked that trend, which is a sign of strength.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

1.73

2.01

2.27

2.76

3.17

Diluted   EPS ($)

1.43

1.55

2.41

3.63

4.27

 

When we look at the last quarter on a year-over-year basis, we see increases in revenue and earnings. On a sequential basis, revenue has improved and earnings have remained even.

12/2011

3/2012

6/2012

9/2012

12/2013

Revenue   ($)in   millions

838.17

778.02

831.77

769.81

882.96

Diluted   EPS ($)

1.06

1.23

1.23

1.12

1.12

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry

The healthcare landscape is changing, and everything favors generics. A weak consumer will actually be a driver for generics. Therefore, the industry has the potential to remain strong even if the economy weakens. That said, if the stock market suffers a steep correction, this industry won’t be invincible. It will likely weather the storm better than most industries, but it wouldn’t be the safest option, either.

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Conclusion

Perrigo has been aggressive with acquisitions. It pinpoints markets that are likely to see future growth and establishes itself in those industries. This is also a company with strong margins, excellent management, a history of positive earnings surprises, a deep pipeline, and exposure to a strong industry. The 0.30 percent yield is small, but it doesn’t hurt.

Perrigo is an OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute —

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