Perrigo - A Prime Buying Opportunity

Perrigo Company (NDQ:PRGO) April 21, 2009 - $23.71

52-week range: $18.54 (March 2, 2009) - $43.08 (May 2, 2008)

Dividend = $0.055 quarterly = 0.93% current yield

Perrigo is a market share leader in store-brand over-the-counter drugs and vitamins. They also manufacture specialty creams and ointments. PRGO supplies about two out of every three of these type products to pharmacies worldwide and they account for about 70% of Perrigo’s sales. A smaller division makes active ingredients for others on a contract manufacturing basis.

Wal-Mart (WMT), CVS (CVS) and Walgreens (WAG) are major customers with about 20% of annual revenues coming from WMT alone in FY 2008. Unlike most companies, earnings in the fiscal years 2008 and 2009 (FYs end June 30) will both come in substantially higher year-over-year. If anything, their store-brand and generic products may be gaining share in the dismal economic environment.

PRGO shares hit a new all-time high of $43.08 last May and held up very well until February’s market meltdown this year. The dead low of $18.54 was touched briefly in early March when investors were selling off virtually everything.

Here are the last few years' per share figures as reported by Value Line.

FY 2005 earnings exclude a ($5.06) non-recurring loss and FY 2009 data includes estimates for the second half ending June 30, 2009.

FY …... Sales ….. C/F ….. EPS ….. Div ….. B/V ….. Avg. P/E

2005 … 10.91 …. 0.77 …. 0.49 ….. 0.16 …..6.29 ……. 36.6x

2006 … 14.71 …. 1.41 …. 0.79 ….. 0.17 …..6.90 ……. 19.1x

2007 … 15.50 …. 1.46 …. 0.84 ….. 0.18 …..8.08 ……. 20.7x

2008 … 19.53 …. 2.35 …. 1.58 ….. 0.21 ….10.01 …… 18.9x

2009 … 22.85 …. 2.65 …. 1.85 ….. 0.22 ….10.55 …… 18.7x

At Tuesday’s close of $23.71 PRGO has a trailing P/E of just 13.7x and a calendar year 2009 forward multiple of about 12.5x. That’s the lowest valuation on these shares in decades. At the dead lows in 2000 and 2002 PRGO traded at 19.3x and 15.8x respectively. Buyers at those exact nadirs saw their shares move up by 266% and 168% respectively (within 18 months from those levels). PRGO rarely gets cheap making this a prime buying opportunity to establish a position in this fine niche company.

The FY 2010 Zacks estimate is now running at $1.97 /share. If we see a bounce back to just an 18 multiple, these shares could be north of $35 twelve months from now.

Is that a crazy target? Nah. Perrigo shares hit peak prices of $36.90 in late 2007, $43.08 last year and were as high as $32.50 in January 2009. With sales, cash flow, EPS and book value all growing I see no reason why a 40% – 50% move would be a surprise. Morningstar assigns Perrigo a 4-Star rating (out of 5) and carries a 'Fair Value' of $33.00 right now.

Here’s a nine-month play for those of you who are options savvy:

………………………………… Cash Outlay ……….. Cash Inflow

Buy 1000 PRGO @$23.71 ……...$23,710

Sell 10 Jan. $25 calls @$2.70 …………………………… $2,700

Sell 10 Jan. $25 puts @$4.00 ……………………………. $4,000

Net Cash Out-of-Pocket …………$17,010

On expiration date (Jan. 16, 2010) if PRGO has risen by $1.30 or more

[plus 5.5% from the trade inception price]:

Your $25 calls will be exercised.

You will sell your shares for $25,000.

Your $25 puts will expire worthless (a good thing for you as a seller).

You will have collected $165 in dividends.

You will have no further option obligations.

You would then hold no shares but would have $25,165 in cash for your original outlay of $17,010.

That’s a best-case scenario profit of $8,155/$17,010 or + 47.9% achieved in nine months on shares that only needed to go up by 5.5%.

What’s the Risk?

If the shares stay below $25 through expiration date:

Your $25 calls will expire worthless.

You will have collected at least $165 in dividends.

Your $25 puts will be exercised.

You will be forced to buy an additional 1000 shares and to lay out another $25,000 cash.

You will end up owning 2000 shares of PRGO.

What’s the break-even on the whole trade?

Your net outlay from start to finish would be:

The original ……..$17,010 for the first 1000 shares less option premiums.

Plus …………….. $25,000 from the exercised puts.

.............................. $42,010

Less ………………... $165 dividend received.

Net Cost …………$41,845 for 2000 shares = $20.93 /share.

That means Perrigo shares could drop by up to $2.78 or (-11.7%) from Tuesday’s close without causing a loss on this trade.

Disclosure: Author is long PRGO shares and short PRGO options.

Comments

[User 287492:]

This company has quite a substantial amount of Long term debt at about $895 million and Cash on hand about $300+ millions. Any idea when does the debt is maturing ?

Apr 22 10:26 AM

[jerrion:]

$400 million of that debt is secured by restricted cash on their balance sheet.

Apr 22 10:54 AM

[Paul Price:]

Jerrion is correct. $400 MM of debt is dsecured by an offsetting
$400 MM deposit. Net debt is quite reasonable.

Apr 22 11:28 AM

[dividendmac...:]

Paul as a person who has followed your numerous selections over the past 18 months and have recorded many on my website including your selection of dollar tree let me ask a question what do you attribute the drastic drop from january's highs.The market is down less than 10% and the stock is down almost 30%. Could this be another pick like KEM

Apr 22 04:08 PM

[Paul Price:]

7:58 AM Perrigo Company (PRGO):

FQ3 EPS of $0.50 beats by $0.05. Revenue of $506M (+5.3%) vs. $527M. Issues upside EPS guidance for FY '09 of $1.80-1.90, vs. previous guidance of $1.75-1.90.

Shares +4.3% premarket.

May 07 08:11 AM

[Paul Price:]

Zacks now loves PRGO….

Perrigo Company By: Tracey Ryniec - ZACKS
October 13, 2009

Perrigo has surprised on estimates the last two quarters as it reported record sales for fiscal 2009. PRGO has a PEG ratio of just 0.94.

Perrigo manufactures over-the-counter and prescription pharmaceuticals, nutritional products and other consumer products. It also provides over-the-counter (OTC) products for various stores under those store brand names. For instance, it manufactures an acetaminophen product similar to the Tylenol brand.

Record Sales in 2009

On Aug 18, Perrigo reported fiscal fourth-quarter and full year 2009 results and saw record sales and earnings for the year. It was the first year the company reported $2 billion in sales, which was a 16% rise from 2008. It was also the second year in a row of record sales. The increase was driven by new product sales.

For the fourth-quarter sales grew by 7.1% to $508.2 million from $474.2 million in the fourth quarter of 2008. The best performing sectors were the Consumer Healthcare segment, which rose by 23%, and the Rx Pharmaceutical segment, which climbed 27% year over year.

Earnings per share for the fourth quarter jumped 13.6% to 50 cents from 44 cents in the year ago period. This also beat the Zacks Consensus Estimate of 46 cents by 8.70%.

Growth Expected to Continue in Fiscal 2010

Perrigo is bullish about fiscal 2010, forecasting year over year earnings per share growth between 7% and 13%. It expects earnings per share of $2.00 to $2.12.

Analysts expect earnings growth of 12.19% over fiscal 2009. The 2010 Zacks Consensus Estimate has risen in the last month to $2.10 from $2.05, which is at the higher end of the company’s guidance range. 6 out of 10 covering analysts raised in that time period.

Perrigo is expected to report first quarter 2010 earnings on Nov 5.

Income

Shareholders are currently being rewarded with a dividend yielding 0.60%. This is well above the industry average, which is, actually zero.

Fundamentals

Perrigo is a Zacks #1 Rank (strong buy) stock. It has a forward P/E of 17.18. The company also has a stellar 1-year return on equity of 20.19%.

Oct 13 11:52 AM

[Paul Price:]

PRGO raised its dividend by 13.6%.

The new rate is $0.0625 quarterly versus the old rate of $0.055.

Record date ..... Nov. 27
Payment date ... Dec. 15

Nov 01 07:08 PM

[Paul Price:]

WEDNESDAY, NOVEMBER 4, 2009
HOT RESEARCH AM - Barrons.com

Perrigo a Go-Go Barrington Research says the generic drug maker's stock can rise 18% from current levels.

Perrigo (PRGO: Nasdaq)
By Barrington Research ($38.10, Nov. 3, 2009)

PERRIGO CO. (TICKER: PRGO), the world's leading store-brand health-care products manufacturer, reported fiscal first-quarter 2010 earnings that were significantly above expectations.

Based on new earnings-per-share estimates, and assuming the stock deserves a price-to-earnings multiple that is a slight premium to the market, expanding to 17 times forward earnings from 15 times, we have raised our price target to $45 from $32, which is 17 times our fiscal 2011 estimate of $2.65. With 18% upside to our price target, we reiterate an Outperform rating.


First-quarter adjusted EPS was a record 66 cents, up 60.5% from 41 cents a year ago, 14 cents better than our estimate of 52 cents, and 17 cents better than the Street consensus of 49 cents. Consolidated revenues from continuing operations for the quarter were $528 million, up almost $73 million or 15.9% from a year ago as well as up almost $20 million from the fourth quarter of 2009.

Revenues for the quarter came in above both our estimate of $507.6 million and the Street consensus estimate of $491.2 million.

The sales growth was driven by the Consumer Healthcare segment (up 19.4% from the prior year) reflecting incremental new product sales, higher volume of existing products and recent acquisitions. The company said there has been no competition in omeprazole and that the cough/cold/flu demand has been stronger than anticipated. Also, Perrigo's Rx Pharmaceuticals had a great quarter, reporting sales that were $47 million, or 42%, higher last year, due to increased volume of existing products and solid results from the ORx business [over-the-counter health-care products].

The company raised its guidance for fiscal 2010 EPS to a range of $2.35-$2.45 from $2.00-$2.12 per share previously. Applying the first-quarter results and consistent with the commentary on the conference call, we have raised our 2010 EPS estimate to $2.46 from $2.13 previously.

For fiscal 2011, we are applying more modest sales growth assumptions, but we believe most of the expected improvement in consolidated operating margin is sustainable. We are forecasting consolidated revenue growth of approximately 5%, leading to EPS growth of approximately 8%, or $2.65 per share, up from our prior estimate of $2.33.

-- Derek W. Leckow

Nov 05 06:54 AM