Many traders refuse to buy stocks that offer great value simply because their charts have been weak. They cling to the idea that “the market” must be telling you something and that somebody must know more than you do, or the shares wouldn’t be declining.
Every stock has a 52-week high and low, often varying by large percentages. Subscribers to the “avoid negative momentum” school of thought rarely get in near the low end.
Irish-domiciled Perrigo PLC (PRGO, Financial) is the world's largest manufacturer of OTC pharmaceutical products for the store brand market. It is also an industry leader in pharmaceutical technologies.
Management fought off a hostile cash plus stock takeover bid from Mylan (MYL, Financial) last year, preferring to remain independent, at least for now.
Previous growth has been quite good, and the firm’s future appears bright. Results from fiscal 2005 through 2015 showed huge increases across all major metrics. Note that, starting this year, the company switched from a June 30 fiscal year to calendar year reporting.
Perrigo shares peaked above $215 during the takeover battle. As of April 3, they had drifted back under $127. Consensus views for about $9.60 in 2016 EPS mean the stock is now available for about a 13.2x multiple. That compares quite favorably with Perrigo’s historical P/E, which averaged around 21.0x since the start of 2010.
The 14.5-cent quarterly dividend provides a 0.46% current yield at a very conservative 6% payout ratio. While not exciting on an absolute basis, shareholders are now collecting the highest yield on this fine company since the early days of 2010. Back then Perrigo was primed to zoom from $37.50 to north of $104 in under two years.
Management thinks the stock is undervalued. The firm bought back 3.3 million shares last year at an average cost of $151.50. Another $1.5 billion in buybacks is still authorized. At today’s quote that activity would be quite accretive.
A return to even 18 times forward estimates would support a 12-month target price of about $173, more than 36% above last week’s close. That’s not at all far-fetched. Perrigo peaked during 2014 at $171.57, when EPS came in at just $6.39. Remember that Mylan was offering well over $200 for the firm last spring.
Independent research outfit Morningstar assigns Perrigo a 4-star buy rating while very conservatively calling present-day fair value as $150.
Standard & Poor's is more enthusiastic than Morningstar. It agrees on a 4-star, out of five, BUY rating but figure fair value at almost $193.
Perrigo offers substantial upside based on all quantitative measures. Valuation has rarely looked this favorable. The possibility for another buyout offer remains a wild card that could send the stock much higher in short order.
Ignore Perrigo’s weak chart action. Buy now while it remains out of favor. The aging of America makes for nothing but positive demographic trends. The company's long history of success also bodes well for Perrigo's future prospects.
In terms of future capital gains, Perrigo might be just what the doctor ordered.
Disclosure: Long Perrigo shares, short Perrigo January 2018 puts.
