Author: Robert Freedland
Covestor model: Buy and Hold Value
Disclosure: Long PRGO
One of my holdings is Perrigo (NASDAQ: PRGO). I would like to share with you my thoughts on this stock, as they illustrate once again my thinking on what makes a stock attractive for purchase.
According to the Yahoo “Profile” on Perrigo (as of 6/21), this company
… through its subsidiaries, develops, manufactures, and distributes over-the-counter (OTC) and generic prescription (Rx) pharmaceuticals, nutritional products, infant formulas, active pharmaceutical ingredients (API), and pharmaceutical and medical diagnostic products worldwide.
One of the first things I check when examining a stock for investment is how the underlying company is doing. Probably the most important factor is their latest quarterly report. Looking at this information I certainly would like to see a company that can grow its business (organic growth preferred over growth just from acquisitions), is profitable and is doing better than expected. Sometimes we as investors can get lucky and the company raises the ante so to speak by increasing guidance. A price of a stock is determined by past and expected results. There is a certain re-equilibration of the stock price as analysts and investors digest the provided information and reset estimates going forward.
On May 3, 2011 Perrigo reported third quarter 2011 results. Revenue for the quarter came in at $691.6 million, a 29% increase from the prior year which in itself is an impressive results. Earnings came in at $89.1 million or $.95/share for the quarter ended March 26, 2011. Adjusted income from continuing operations came in at $1.07/share. This was a 43% increase in earnings over the prior year when the company had reported earnings of $62.2 million or $.67/share.
Occasionally companies use earnings announcements to provide guidance for analysts and investors about how management is viewing future prospects for the business. Hopefully the company is anticipating growth in earnings and revenue. Sometimes they will confirm pre-existing guidance, but it is also possible that management can reduce guidance or on the other hand, if things are doing well, the company may well revise prior estimates and raise guidance. Again, if we consider that stock prices are determined in a complex fashion that takes into consideration estimates of future earnings, clearly raising guidance will cause some investors to reprice the value of the given stock higher.
In any case, Perrigo, in the same earnings report raised guidance for adjusted earnings per share to come in at $3.90 to $4.00, up from the prior guidance of $3.75 to $3.90.
Ideally, a stock will perform well not because it just reported a single quarterly report that looked good, but rather that the company was continuing a longer-term record of such positive financial results. I utilize Morningstar.com which provides both free as well as subscription information.
If we look at the Morningstar financials on PRGO, we can see that revenue has grown steadily from $1.37 billion in 2006 to $2.27 billion in 2010. In that same period diluted earnings per share have grown steadily from $.76/share in 2006 to $2.40/share in 2010.
Morningstar shows that free cash flow, has increased from $90 million in 2006, dipping to $24 million in 2007, then steadily growing to $258 million in 2010 and pulling back a touch to $255 million in 2011. This company clearly is able to generate increasing cash as it grows its business.
In terms of the balance sheet, as of 3/2011, Perrigo has $1.381 billion in current assets balanced against $907 million in current liabilities. This generates a current ratio of 1.52. Generally current ratios of 1.5 or higher suggest a healthy, at least short-term, financial health. Perrigo has total assets of $3.09 billion compared to total liabilities of $2.01 billion.
Beyond the fact that a company underlying a stock is doing well, which apparently Perrigo (PRGO) has been doing, it is important to find out about the valuation of the stock price to help determine if the purchase of the shares is a reasonable option. I have found that the easily accessible Yahoo “Key Statistics” continues to be helpful in this regard.
For Perrigo, we can see that the market cap is $8.12 billion as of 6/21 making this a large cap stock. Perrigo’s trailing p/e is a bit rich at 26.8 as of 6/21, but the forward p/e (fye Jun 26, 2012) is a bit better at 19.21 as of 6/21. The reasonableness of a p/e is really a function of anticipated growth. You and I are obviously more willing to pay higher p/e valuation if we are fairly certain that future earnings will increase significantly. This ‘dynamic valuation’ is calculated via the PEG ratio which for Perrigo comes in at a fairly reasonable 1.57 as of 6/21.
Perrigo has 92.73 million shares outstanding with 85.67 million of them that float as of 3/2011. The company pays a modest dividend of $.28/share with a forward yield of .30% as of 6/21. The company has lots of room to raise the dividend and use earnings for corporate purposes as their payout ratio is only at 8% per Yahoo. Their last stock split was back in August, 1993, when the stock was split 2:1.
In summary, I like Perrigo (PRGO) enough that I bought shares! From a ‘story’ perspective, the challenges that our current economy faces has forced more consumers to watch their purchases closely and Perrigo fits into that theme selling companies ‘store brand’ generics to compete with more expensive branded items.
They recently reported a very strong quarterly report and have been growing their business steadily for the last five years. Their recent results exceeded analysts’ expectations and the company provided bullish guidance going forward. Valuation is a tad rich but not really wildly out of balance with the expected performance. Technically the stock looks strong and appears to be a price move higher.
I do not know what the stock market will hold going forward. It may well be wise to wait before entering any new positions in a market we are facing, but I believe that long-term, it is wisest for the investor like myself to identify stocks of companies with the characteristics that I have commented on throughout my blog multiple times. I hope you find these evaluations useful!
If you have any comments or questions, please feel free to leave them right here on the blog.
Yours in investing,
Bob
Sources:
PRGO profile, key statistics from Yahoo Finance, https://finance.yahoo.com/q/pr?s=PRGO+Profile and https://finance.yahoo.com/q/ks?s=PRGO+Key+Statistics
“Perrigo’s fiscal 3Q profit soars 43 percent” Company Press Release. 5/3. https://finance.yahoo.com/news/Perrigos-fiscal-3Q-profit-apf-722258339.html?x=0&.v=1
Financial statement information from Morningstar.com http://financials.morningstar.com/income-statement/is.html?t=PRGO®ion=USA&culture=en-US
