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Mylan’s (MYL) comeback is on track! Mylan reported 4Q earnings late last week and the results were excellent. At a time when most long investment theses are deteriorating, this one is intact if not strengthened. EPS of $0.26 came on better than expected revenues, margins and cash flow. Although the tax rate was lower than expected, this was a quality beat.

The integration of Merck KG assets is proceeding as planned and there’s now talk of better than initially projected synergies (previously guided at $120M, but now likely materially higher, perhaps as much as $150-160M). Base (generic) revenues are strong and expected to continue growing high single digits (ex-currency) and Mylan expects to generate at least $450M (and as much as $500M) in operating cash flow this year, which appears very doable given $135M generated in the quarter. Both Matrix and Dey also appear to be doing well.

It's hard to poke holes in a clear over deliver like that, but I suspect bears will persist. Sentiment, although not as bad as it was a few months ago, is still pretty bad. Short interest was almost 64m shares as of 1/7 and that was up in the prior few weeks. Although many surely covered on the earnings beat, a good amount are apt to remain in hopes of a stumble in the current quarter. That said, there should be no doubt that Mylan is executing as management has guided, so I have to believe that the burden of proof is shifting to the bears.

Management reiterated EPS guidance of $0.90-$1.10 in 2009 and $1.50-$1.70 in 2010. Despite solid execution on FDA filings and approvals, better sales, solid operating cash flow, and accelerated debt pay down, consensus remains well below guidance for 2010, and the shares trade on a substantial discount to peers as well as its historical range on cash flow and earnings; even though they’ve now doubled off their lows. A few months ago, I argued that the shares should be at a conservative 12 times '09 earnings in the coming months and thought if the company could execute as promised over the next few quarters, investors would start thinking about 12 times the low end of the 2010 guidance ($18).

Although I think it’s still a bit premature to have great confidence in 2010 (especially in light of heightened macro and forex headwinds), I think it is reasonable to expect that the shares garner a 13-14 multiple on current year estimates if they can meet expectations and reiterate guidance when they report in May.
Furthermore, I do think it reasonable to expect that continued execution, free cash flow (exp. ~$350mm this year and $500mm+ in 2010 by the way) and pay down of debt taken on to do the Merck KG deal should lead to confidence that the low end of management’s 2010 guidance is doable and thus a move to $14 or $15 by year end appears reasonable.

As confidence in management increases and visibility on 2010 improves, then estimates and the multiple can increase, and we might see that $15 sooner than you think. Although I don't recommend chasing anything in this market, I think buying pullbacks in this name makes sense. If it keeps on keeping on near term, put the next earnings date on your calendar and look to take advantage of an opportunity should it arise then.

Disclosure: Long MYL

Source: Mylan: Showing Up Doubters