John Paulson (Trades, Portfolio) increased his position in Actavis PLCÂ (ACT, Financial) through Paulson & Co by 262% to $1.68 billion in the company's latest filing, with 5.6 million shares. Actavis is the fund's second largest holding in its $19.64 billion portfolio behind Shire PLCÂ (SHPG, Financial) and Time Warner Cable Inc (TWC, Financial), representing 10.1% and 6.6% of Paulson's portfolio, respectively.
Actavis PLC, formerly known as Actavis Limited was incorporated in Ireland, in 2013. It is an integrated specialty pharmaceutical company engaged in development, manufacturing, marketing, sale and distribution of generic, branded generic, brand name, biosimilar and over-the-counter pharmaceutical products.
Andreas Halvorsen (Trades, Portfolio)´s Viking Global is the major shareholder of Actavis after increasing by 34% to $1.81 billion and 6.1 million shares. Daniel S. Och´s Oz Management and Dan Loeb´s Third Point both increased their stakes in the company by 10% and 4%, respectively. Oz Management's stake is now worth $3.7 billion and Third Point's is now valued at $3.6 million. Other hedge fund which significantly increased Actavis´ position was Robert Pitts´Steadfast Capital Management, ramping up its position by 211% to $2.4 billion.
We believe that a key reason to justify this bullish sentiment is that the P/B ratio is close to a five-year low. On the other hand, the company´s asset growth grows faster than its revenue growth rate in a period of five years is indicative that the firm is less efficient (58.5% vs 22.3% per year).
The pharma- company operates in a sub-industry with good outlook for the next 12 months. There will be several patent expirations in 2015 and it is expected sale increases for next year. Other reason that could affect income statements this year could be the effect of the foreign exchange.
Actavis should focus on revert margins. Operating margin for the quarter that ended in Mar. 2015 was -7.60% and ranked lower than 82% of the 598 Companies in the Global Drug Manufacturers - Specialty & Generic industry. One way to further improve margins is via cost restructurings.
The ROE is useful for comparing the profitability of a company to that of other firms in the same industry. The company has a current annualized ROE for the quarter that ended in Mar. 2015 was -4.11% which ranked lower than 76% of the other companies in the industry.
It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
| Year | Dec05 | Dec06 | Dec07 | Dec08 | Dec09 | Dec10 | Dec11 | Dec12 | Dec13 | Dec14 |
| ROE (%) | 6.39 | -23.54 | 7.99 | 12.05 | 8.65 | 5.85 | 7.62 | 2.63 | -11.23 | -8.61 |
In terms of valuation, the stock sells at a forward P/E of 13.4x, trading at a discount compared to an average of 23.0x for the industry. To use another metric, its price-to-book ratio of 1.76x indicates a discount versus the industry average of 3.61x while the price-to-sales ratio of 5.06x is above the industry average of 3.93x. Further, the stock is trading nearly its all-time high at $298.79. In my opinion, this clearly doesn´t create an opportunity to start an investment in Actavis stock at a cheap price currently.
Disclosure: Omar Venerio holds no position in any stocks mentioned
