Wednesday January 23, 2013
by Tom Bishop, editor BI Research
Perrigo (PRGO) is primarily in the business of making store brand, over-the-counter healthcare products. The products contain the same active ingredients, work just as well and yet generally cost consumers about 25-30% less than the brand name products right next to them on the shelf.
Meanwhile they also cost the retailer (like CVS or Wal-Mart) about 50% less, thereby enabling a fatter profit margin and great return on a smaller investment in inventory. Everybody wins.
Within this store brand segment, besides the obvious the Company also sells infant formula, pet care products (like flea collars), nutraceuticals and vitamins. In all, this accounts for about 75% of revenues.
The company derives another 20% of its revenue from prescription topical and specialty generics, with the balance coming from its active pharmaceutical ingredients business.
The shares climbed to $110 as the new year got underway, only settling back after Goldman Sachs downgraded the shares from neutral to sell with a price target of $110 (about where it was at the time).
The premise seemed to focus on the p/e vs. growth prospects. Nevertheless, I’ve always found Perrigo a little pricey. It has traded as high as $120 in the past year, but I felt $103 was a relatively good entry point for a quality stock with a great money saving concept.
I mean who doesn’t like the premise of this company and how it saves all parties money? Perrigo targets 5 to 10% revenue growth and 10 to 20% earnings growth and trades at 20 times the FY6/13 EPS consensus of $5.55, which is the mid-point of company guidance.
Of course acquisitions, which have been numerous in the past are always a wild card that could juice results. Also Perrigo is well positioned for an upcoming $10 billion worth of formerly prescription drugs that will become OTC.
And they have 35 ANDA’s (9 of which are first to file with 180 days of exclusivity) pending FDA approval with $4 billion in branded sales. Then too, Perrigo’s ROE is a plump 22% and its share count has held remarkably steady since 2009.
And, note that this bad flu season can’t be bad for business. So all this spells a quality company that deserves a quality valuation and is a Buy for Long Term investment.
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