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4 Pharmaceuticals with Long and Short Opportunities

February 28, 2012 | About:
The pharmaceutical business is known to be a confusing, highly competitive and low-profit industry. Nevertheless, there are always abundant opportunities to make a healthy return with pharmaceutical companies that are well positioned, financially and internally (management wise), to grow revenue and gain market share. The following is an analysis of four stocks based on fundamental, financial, technical and qualitative data. These four companies are benefiting from effective management, strong liquid assets, acquisitions and solid organic growth. Relax, grab a cup of Turkish coffee and find out whether you should go long or short on the following pharmaceutical stocks.

Alexion Pharmaceuticals Inc. (ALXN): Alexion Pharmaceuticals Inc. has a market cap of $15 billion and it's currently trading a few dollars below its 52-week high of $85.48. If fact, that's an all-time high as the stock has been on a bullish trend since 2006.

In May 2011, the stock was split two to one, which helped the stock trade even higher. More recently, Alexion Pharmaceuticals closed its previously announced acquisition of Enobia Pharma Corporation. It is obvious management is strategically positioning the company to increase revenue and gain market share of the highly competitive pharmaceutical industry. Therefore, I believe this will cause the stock to continue appreciating as long as management strategically acquires businesses that will drive price stocks higher by increasing revenue and penetrating new markets.

For the past 12 months, sales and income increased 44.80% and 80.70%, respectively. Moreover, revenue during the last four years has been increasing at a compound annual growth rate of 31.87% while income has been increasing at a compound annual growth rate of 51.65% during the same time period. As a result, cash flow has been strengthening as well. Assets have been increasing at a compound annual growth rate of 30.73% during the last four years while liabilities only increased at a compound annual growth rate of 3.08% during the same time period. As of fiscal year 2011, the stock has no debt. I believe the stock will continue to appreciate in value due to its healthy financial position as well as its increasing revenue and market share through acquisitions and organic growth, thus I rate this stock as a buy.

Teva Pharmaceutical Industries Limited (TEVA): Teva Pharmaceutical Industries Limited is currently issuing an annual dividend of $0.69, has a yield of 1.50% and a payout ratio of 25%.

During the last four years, revenue has been increasing at a compound annual growth rate of 13.37% while income has been increasing at a compound annual growth rate of 45.89% during the same time period. Earnings per share (TTM) came in at $3.09 while its competitor Watson Pharmaceuticals Inc. (WPI) reported earnings per share of $2.06. The stock has a five-year expected price-to-earnings-to-growth (PEG) ratio of 0.99, which implies the stock is appropriately priced. Typically, a stock with a PEG lower than one is said to be undervalued while a stock with a PEG higher than one is said to be overvalued.

The stock recently reached a four year low of around $35, which in my opinion, was a good time to buy. I continue to believe it's a good time to buy some shares because revenue is expected to continue increasing, the stock has better gross and profit margins than competitors, and it's appropriately priced. I rate this stock as a buy.

Vertex Pharmaceuticals Incorporated (VRTX): Vertex Pharmaceuticals Incorporated has a market cap of $8.21 billion. For the last twelve months, sales and income increased 883.90% and 103.90%, respectively. During the last four years revenue has been increasing at a compound annual growth rate of 68.38%.

Earnings per share came in at $0.14 while its competitors Bristol-Myers Squibb Company (BMY) and Merck & Co. Inc. (MRK) reported earnings per share of $2.16 and $2.02, respectively. Nevertheless, Vertex Pharmaceuticals' price to earnings ratio of 280.29 is fourteen times that of its competitors, a strong indication the market is expecting high growth from this stock; therefore investors are willing to pay a premium to own shares now before they continue to rise higher. Yes, I think the stock is expensive compared to its competitors; however, revenue has been increasing at a very high rate and assets have been growing about 5% more than liabilities for the last four years.

In addition, management has more than enough liquid assets to cover its short term liabilities, thus liquidity is not a concern, at least for now. For these reasons I rate this stock as a buy.

Watson Pharmaceuticals: Watson Pharmaceuticals has a market cap of $7.65 billion and does not issue dividend payments yet. The recent acquisition of Ascent Pharmahealth drove the price from around $55 to $60 per share.

For the past twelve months, sales and income increased 28.50% and 41.50%, respectively. During the past five years, revenue has been increasing at a compound annual growth rate of 12.92% while income has been increasing at a compound annual growth rate of 16.62% during the same period.

Earnings per share came in at $2.06 while its competitors, Mylan Inc. (MYL) and Novartis AG (NVS), reported earnings per share of $0.96 and $3.78, respectively. Price to earnings ratio for Watson Pharmaceuticals is 29.21, higher than Mylan (24.42) and Novartis (14.97).

One drawback I find with the stock's finances is that over the last four years cash and equivalents has decreased at a compound annual growth rate of 19.87%, inventory has increased at a compound annual growth rate of 17.09%, and accounts receivable has increased at a compound annual growth rate of 39.42%. These trends imply less liquidity for the company and more cash stuck in inventory and accounts receivable. That is cash they cannot use to reinvest in other projects, pay off debt, increase research and development or even put it aside to issue a dividend in the future.

The stock was on a solid bullish trend since late 2008. However, it recently made a pullback to $60 per share after having reached the $70 level. If the stock crosses $57, its previous resistance level, I would go short, if not I rate it as a hold because of the previously stated reasons.

About the author:

Dividend King
I am primarily an investor interested in creating passive income streams through dividends. I focus on finding and analyzing dividend paying stocks, MLPs and REITs that are a good fit for income investors.

I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.

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