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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 (NYSE:WMT), CVS (NYSE:CVS) and Walgreens (NYSE: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.

Source: Perrigo - A Prime Buying Opportunity