Stock of the Week
NYSE Symbol: MYL
Industry: Generic drugs
Price as of 10/21: $37.02
The markets continue to churn sideways. In fact, the markets recently spent 9 trading days vacillating between up and down days. Part of the issue is waiting for the election to be over. The bigger issue is a lack of earnings growth to propel the averages higher. For every Dow component reporting better than expected earnings, there is one reporting less than spectacular earnings. With the markets trading not far from all-time highs, there aren't a lot of stocks trading at cheap valuations, but there are always pockets of interest. Case in point, the healthcare space. Besides the financials, the healthcare stocks have been a lightning rod for this political season. It's true a number of drug companies have unjustly hiked prices of certain drugs, but the broader sector is oversold and very cheap. A recent featured stocks, Celgene is expected to grow sales and earnings by 20% for the next five years, yet the stock trades for just 14 times earnings. Pretty cheap. This week's featured stock is another cheap drug stock trading at a three year low. The stock of the week is Mylan. Speaking of lightning rods, Mylan is one of those such companies after dramatically hiking the price of their Epipen drug. The CEO had to go in front of Congress to explain the price hikes. Since then, Mylan has introduced a generic version of the Epipen and made a $465 million settlement with the U.S. Department of Justice and other government agencies that will resolve questions that have been raised about the classification of EpiPen Auto-Injector. Going forward, Mylan will face further lawsuits and headline risk, but with the stock trading at a three-year low and just 7 times earnings, you would expect a lot of the bad news has been priced in. Mylan is not a conservative stock, but investors with a time horizon of 12 months or longer should see capital appreciation potential as investors focus on the bulk of Mylan's generic drug business that remains strong and growing.
Mylan will report earnings November 9th, ironically the day after the Presidential election. Nov 9th, may usher in the beginnings of a relief rally in the drug stocks. The bigger question may be how long the rally will last? Longer term the sector is cheap. In a speech this week, hedge fund manager David Einhorn made a good case for Mylan. The vast majority of Mylan's business is generic drugs which is expertly what the federal government wants to see more of to avoid future price gouging issues.
David Einhorn currently sees Mylan's earnings in the high $4s this year, of which a dollar will be EpiPen. Next year it's supposed to earn something in the mid $5s. The following year he thinks Mylan can generate earnings in the low $6s with the EpiPen only generating 25 cents a share. Excluding the EpiPen from earnings, Einhorn still sees earnings of around $6 a share in 2018.
Based on David Einhorn's earnings estimates, Mylan trades for 8 times reduced earnings, 6 times 2017 earnings, less than 6 times 2018 earnings and just 1.5 times sales. Patient investors should be rewarded with this stock. The stock has 30% upside if it trades for just 2 times sales. If the stock can trade for 10 times earnings, the stock has 50% upside in the next two years and if the company can grow earnings and sales once again, the stock should trade with a sector multiple of 14 or 15 which means the stock could have 150% upside from current levels. In the short term, the stock may remain under pressure, but longer term, the stock is cheap and compelling.