Love a bargain? Then today’s recommendation, from BI Research publisher Tom Bishop, is for you. And it’s below his buy-under price right now.
“I love saving money. I shop around for the best price. I wait for things to go on sale. I like to tag sale and whenever I can I buy store brands. ... And of course I don’t like to overpay for stocks either. This kept me far from the dot-com bubble bust in 2000, and saved us a ton of money. This has also kept me out of some stocks I really like but think are overpriced. Often I watch them climb anyway.
“This is relevant to our new recommendation in several ways. First off, Perrigo Company (PRGO, $105) is exactly one of those stocks. Great company, great concept, great growth but pricey P/E to growth. So I vowed if it ever backed off a worthwhile amount (without a serious problem) I’d recommend it — and recently it did.
“While it is still a little pricey, I do realize you have to pay up for a good stock in many cases. And second off, Perrigo’s business fits into the save-money theme big time. The company gets 75% of its revenue by making store-brand OTC healthcare and generic pharmaceuticals. Their ingredients are identical to the brand-name products and go through the same process as generic drugs to get FDA approval. They appear right next to, say, a bottle of Scope or Advil at CVS or Walmart. ...
“Store brands are to brand-name OTC healthcare products as generic drugs are to brand-name prescription drugs, except they are out in the aisles instead of behind the pharmacist’s counter. But guess what? Perrigo gets most of the rest of its business (another 20%) from the sale of generic pharmaceuticals. Win-win. And while I am at it, they get the balance of their revenues primarily from their active ingredients business and selling some of them to third parties. ...
“[Perrigo’s] prescription Specialty Topicals and Generics segment accounts for about 20% of revenues and is the most rapidly growing segment, posting 79% growth in FY6/12 and 27% growth in Q1. Here adjusted operating margins are a whopping 45% as compared to about 22% for the company overall. In this segment, Perrigo sticks to non-oral generics like lotions, ointments, creams and such. It has 37 ANDAs pending FDA approval, representing $4 billion in branded sales, and this year plans to launch nine products with branded sales of about $500 million. ...
“Perrigo does 20% of its revenues outside the U.S. One future initiative here is to launch its infant formula products into China.
“For fiscal Q1, Perrigo tabled $770 million in sales vs. last year’s $725 million, which was 7% short of estimates, ergo our opportunity to get on board. It’s mostly short-term stuff and Perrigo actually took its FY6/13 revenue growth guidance up despite this. It also posted a 15% increase in EPS to $1.27, which beat the consensus by $0.03, and took up EPS guidance overall to a range of $5.45 - $5.65. In addition to new products, Perrigo grows via acquisitions, which become quickly accretive. While it targets 5%-10% revenue growth and 10%-20% EPS growth over the longer term, acquisitions could easily juice this.
“The company has about $632 million in cash and $1.4 billion of debt. Perrigo should add some stability and recession resistance to our portfolio, but it will have to rise to $108 to get back above its 200-day moving average. Bluer chip stocks never seem to garner impressive BI Ranks (8.0), which tend to favor faster growth. However I am craving some more stable, economy-resistant stocks right now that still offer good growth. Buy to $106.”
- Tom Bishop, BI Research, December 5, 2012