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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Allergan

April 22nd 2016

Allergan
NYSE Symbol: AGN
Industry: Biotech
Price as of 4/22/16: $229.14

 

The more things change, the more they stay the same. After a dismal January, the major averages have fought their way back to the unchanged level for the year. Amazing turnaround. Year to date, the telecom and utility sectors have led the rebound. Not exactly what you want in a bull market. Energy has been the surprise third best performing sector year to day. We highlighted three oil stocks to start the year, Exxon, Chevron, and Conoco. All three are positive for the year. Our home run stock to start the year, Wynn Resorts has not disappointed up over 40% with more room on the upside in the coming years. The two worst performing sectors year to date, Healthcare and Financials, seem to have the best value. The financials have perked up of late following better than expected earnings this month. JP Morgan and Goldman Sachs are two stand outs. This week, we'll highlight a healthcare stock down over 25% year to date. The stock of the week is Allergan. Allergan has been in the spotlight for the last month as our US Treasury in an unprecedented move specifically targeted the company's merger with Pfizer to prevent more US companies moving their headquarters' overseas. The Allergan/Pfizer merger fell through and Allergan took the brunt of the disappointment dropping 16% in one day. Since then, the stock has dropped further providing an attractive valuation for patient and long term investors.  

Part of the weakness for Allergan is due to the comparisons to Valeant Pharmaceuticals with the rollup strategy of buying companies, raising prices and using the cash and more debt to expand and buy more companies. Allergan has a massive debt load of $42 billion nearly half their market cap of $90 billion. However unlike Valeant, Allergan has a solution for their debt. The company is looking to sell off their generic unit to Israel's Teva Pharmaceutical Industries for as much as $40 billion in cash and stock wiping out nearly all their debt. Teva might be one to look at as well following this deal becoming the undisputed top generic drug manufacturer in the world.

Following this deal to sell their generics, Allergan will have their debt problem behind them so investors can focus on their growth prospects. Thanks to previous acquisitions, Allergan has great growth prospects. On top of simply growing core drug Botox, Allergan reported double-digit percentage gains for a slew of branded therapies in its portfolio. Extended-release Alzheimer's therapy Namenda XR, irritable bowel syndrome with constipation drug Linzess, and low-dose birth control pill Lo Loestrin are some examples of branded therapies in Allergan's pipeline showing 27%-plus year-over-year sales growth in 2015. Allergan is also headquartered in Ireland, the land of low corporate tax rates. The lower tax rate means more of Allergan's profits go to its bottom-line.

Speaking of earnings, Allergan trades for 16 times 2016 earnings, 13.3 times 2017 earnings and trades for 5 times sales. Price to sales is high, but 13 times reduced 2017 earnings is an attractive valuation for a company growing earnings by 20%. The question is will the estimates come down any further? Goldma Sachs seems to think so with an upgrade and a $275 price target on Allergan. The company provides a modest dividend with a yield of just 0.10% so buying Allergan's stock is for capital appreciation and not income. In the short term, the stock may remain under pressure with headline risk, but long term Allergan has real drugs with strong sales and earnings growth for the foreseeable future.