Our first idea is a giant pharma that is growing leaps and bounds by acquisition. Our second recommendation is a sale of a restaurant stock that is underperforming.
Buy: Allergan Corp. (AGN 196)
From Cabot Benjamin Graham Value Investor
Allergan Corp. (AGN; Max Buy Price 219.38) is a leading manufacturer of generic drugs. The company’s goal is to create difficult to produce off-patent drugs. Allergan (formerly Actavis) has grown rapidly in recent years by acquiring large companies within the pharmaceutical sector.
Allergan, based in Dublin, Ireland, merged with Watson Pharmaceuticals in October 2012, acquired Warner Chilcott in October 2013, purchased Forest Laboratories in July 2014, Durata Therapeutics in November 2014, and Botox maker Allergan in March 2015. On June 15, 2015, the company changed its name from Actavis to Allergan Corp.
During the third quarter, Allergan completed the sale of its global generic drug business to Teva. Allergan received $33.4 billion cash plus 100 million shares of Teva. Management has already begun to utilize its new cash hoard by paying down debt, buying back stock, and entering into agreements to purchase six small businesses.
The company will acquire Tobira Therapeutics, a biopharmaceutical company that develops therapies for liver diseases, in a deal worth as much as $1.7 billion. Tobira’s products focus on a common liver disease, known as NASH, which is associated with obesity and type-2 diabetes. NASH can lead to liver cancer or liver failure and affects 5% of the U.S. population. Allergan also purchased Akarna Therapeutics for $50 million. Akarna is also developing treatments for NASH. In addition, Allergan agreed to acquire biotechnology company Vitae Pharmaceuticals for $639 million, in a move aimed at strengthening the drugmaker’s skin-care product line.
Sales will likely advance 11% and EPS will jump 21% to 15.55 in the 12 months ending September 30, 2017. With a price to earnings ratio (P/E) of 13.8 times current EPS and a PEG ratio of 0.93, AGN shares are clearly undervalued. I calculate PEG by dividing the current P/E of 13.8 by the sum of the forecast 5-year EPS growth rate (13.5%) and dividend yield.
Allergan declared a quarterly dividend of $0.70, its first dividend in its history. President-elect Trump will likely avoid curbing companies charging high drug prices, which will benefit Allergan and other drug companies. I expect AGN shares to rise 42% and reach my Min Sell Price of 302.41 within one to two years. Buy AGN at 219.38 or below.
J. Royden Ward, Cabot Benjamin Graham Value Investor, www.cabot.net, 978-745-5532, November 10, 2016