Questcor - Let's Compare Numbers

| About: Mallinckrodt PLC (MNK)

Summary

Short seller allegations aside, how does the financial performance of Questcor stack up?

Can Questcor get to $120 a share in the next 12-18 months?

What can institutional investor's holdings tell us about Questcor?

There has been plenty written about the ongoing short seller allegations leveled against Questcor Pharmaceuticals (QCOR). This article will not enter that debate but instead focus on the financial performance of QCOR compared to two other medical-ethical drug companies and one biomed/biotech company.

While there may be better company comparisons the three companies I chose to compare for this article I am most interested in owning and I have been tracking along with QCOR for some time now. I also believe they make fine comparisons.

The companies are:

Alexion Pharmaceuticals (NASDAQ:ALXN), Salix Pharmaceutical (NASDAQ:SLXP), Jazz Pharmaceutical (NASDAQ:JAZZ)

Fortunately we have a good stretch of performance history for all three companies, something you don't always find in this space given all the bio/drug IPOs over the last couple of years.

Let's first take a look top line revenue growth for all 4 companies:

Revenue Growth Last 4 Qtrs

Latest

Prior

Prior

Prior

QCOR

51%

68%

64%

41%

ALXN

38%

36%

35%

38%

SLXP

30%

29%

30%

18%

JAZZ

28%

32%

68%

91%

Data provided by Marketsmith.

The above grid compares the last 4 quarters of revenue growth for each company. As you can see, QCOR places 1st or 2nd in each quarter.

Next we want to look at how much of the top line makes it to the bottom line:

EPS Growth Last 4 Qtrs

Latest Qtr.

2-Qs Back

3-Qs Back

4-Qs Back

QCOR

53%

73%

96%

25%

ALXN

45%

38%

55%

44%

SLXP

31%

16%

33%

37%

JAZZ

12%

38%

31%

54%

Data provided by Marketsmith.

The last three quarters QCOR has delivered the strongest earnings growth but they lagged the pack 4 quarters back. Growth reported on same quarter a year prior. Example, 2 quarters back QCOR reported 73% growth over the same quarter 1 year prior.

How does longer-term earnings growth compare?

Ann. EPS Growth Last 3 Years

Latest Year

2-Yrs Ago

3-Yrs Ago

QCOR

65%

162%

112%

ALXN

45%

54%

55%

SLXP

31%

-8%

276%

JAZZ

31%

37%

127%

Data provided by Marketsmith.

QCOR again delivers very strong annual earnings growth the last three years. In this comparison we are looking at the annual growth in earnings year to year over the last 3 years.

Here is another look at earnings via the Marketsmith proprietary EPS Growth Rate and Earnings Stability ranking.

QCOR

ALXN

SLXP

JAZZ

EPS Growth Rate

74%

52%

44%

86%

Earnings Stability

36

6

31

31

Data Provided by Marketsmith.

EPS Growth Rate defined as the compound growth rate using the least squares fit over the latest two to three years' earnings per share on a running 12-month basis.

Earnings Stability defined as: indicates in percentage from one standard deviation of the variability around the trend line fitted through 3 to 5 years of earnings' history with a scale ranging from 1 to 99. Lower numbers represent more stable company earnings history.

It looks like QCOR is again holding its own against some incredibly successful peers in terms of growth rate and has only slightly less stable earnings than SLXP and JAZZ.

When we dig into a few other metrics we may be getting some clues about the relative valuations.

QCOR

ALXN

SLXP

JAZZ

Return on Equity

120%

29%

34%

32%

Debt Level

0%

4%

154%

42%

% R&D

6.70%

20.40%

16.80%

5.30%

Annual Pre-Tax Margin

61

42.9

32.5

54.4

Data provided by Marketsmith.

Other than light R&D expenditures, QCOR delivers very strong performance on the above metrics.

A few other helpful metrics:

QCOR

ALXN

SLXP

JAZZ

Current P/E Ratio

12

56

34

26

Market Cap

$4 Billion

$34.3 Billion

$7.2 Billion

$9.1 Billion

1 Year Price Return

119.42%

91.22%

134.84%

165.33%

Sales Ttl Last 4 Qtrs

$799 ($Mil)

1.6 ($Bil)

933.8 ($Mil)

872.5 ($Mil)

EPS Ttl Last 4 Qtrs

$5.48

$3.08

$3.40

$6.31

Next Year EPS Estimates

$7.12

$3.89

$6.46

$8.24

Next Year EPS Growth Rate Estimates

30%

26%

90%

31%

Data provided by Marketsmith, except 1-year price return provided by Stockcharts.com.

With a current P/E of 12 it is hard to argue QCOR is expensive; estimated EPS growth of 30%, while a slowdown from prior years, is still respectable. The low P/E might explain concern the market has with some aspects of QCOR's business but interest by institutions in the stock is on the rise (highest of the group) with an additional 5.1% increase in the number of funds (536) that reported holding QCOR shares in the quarter ending in December 2013. It would appear institutional investors are warming to the company and my guess is they put a bit more research into QCOR that those that are calling the company a fraud. The Legg Mason Opportunity Fund (MUTF:LMNOX) reported 1.58% of their fund invested in QCOR, as of quarter end December 2013. Other well known funds also have positions. This does not mean claims against the company are not true but it does tell us QCOR is being evaluated by other shrewd analysis which have ultimately given a green light to purchase. This is not always the case, in my experience, with some short seller targets.

In a side by side comparison it is clear QCOR has performed on par with peers base on the metrics and time periods covered. In addition, the company is expected to deliver strong earnings growth in 2014. Assuming QCOR can overcome short allegations and deliver estimated earnings it would only take a P/E of 15 to deliver a share price of $120 in the next 12-18 months using earnings of $7.96 (2 years out). If the above holds and the company is rewarded with an even higher valuation it is possible shares could rise much higher.

Mutual Fund Ownership Reporting Provided By Marketsmith.

Disclosure: I am long QCOR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: No investment recommendations have been made in this article. Investing involves risk including the loss of capital. Investors should perform their own research before making an investment decision.