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Excerpt from Raymond James strategist Jeffrey Saut's latest essay (published Monday, April 25th):

In past missives I have suggested names like The Williams Companies (WMB/$31.97/Outperform), EV Energy Partners (EVEP/$56.87/Outperform), LINN Energy (LINE/$38.94/Strong Buy), IBERIABANK Corporation (IBKC/$58.25/Strong Buy), Clayton Williams Energy (CWEI/$94.99/ Outperform), Hewlett Packard (HPQ/$40.99/Strong Buy), NII Holdings (NIHD/$40.80/Strong Buy), Teekay LNG Partners (TGP/$38.83/ Strong Buy), Stanley Furniture (STLY/$5.03/Strong Buy), and Peoples United Financial (PBCT/$13.20/Strong Buy), to name but a few of the companies mentioned in these letters recently. This morning I revisit a name used in my New York City sojourn, namely Hospira (HSP/$57.78/Strong Buy).

On April 20, our fundamental analyst upgraded HSP from Outperform to Strong Buy. His reasoning goes like this.

“We are upgrading HSP to a Strong Buy as various events over the last month and a half have lowered the risk profile on the name. Additionally, a deeper dive into Hospira's pipeline gives us comfort with Hospira's three-year growth goals. With little risk to 1Q11 results, and 2011 guidance, we believe the risk/reward profile is favorable and our new rating reflects increased optimism.

  1. De-risking events: With the FDA approval of generic Taxotere and the appointment of Mike Ball as the new CEO, two primary concerns on the stock have been eliminated. Additionally, prescription data suggests that Hospira's production levels are improving and the company is benefiting from a more favorable pricing environment.

  2. Taxotere is now a source of upside: With Taxotere approved, we have more confidence that our 2011 Taxotere estimates could prove conservative. Every $20 million of Taxotere upside to our $130 million 2011 estimate equates to ~$0.05 in EPS.

  3. Pipeline is vague, but has option value: Hospira's pipeline includes 46 small molecule drugs addressing $13 billion in local market value, 19 of which are currently under regulatory review. We believe the Street is underestimating Hospira's small molecule pipeline and, after adjusting for risk and probability, think it is worth at least $10/share. This analysis gives us more confidence in the intermediate-term growth profile. At these valuations, we believe investors are assigning very little value (if anything) for Hospira's biosimilar franchise (11 proteins with $28 billion local market value).

  4. Excess cash and ‘shareholder value’: Hospira has been more vocal about ‘returning value to shareholders.’ While there are many ways to create value, we suspect that management is looking at a larger buyback or possibly a dividend. Cash flow suffered in 2010 due to transient causes like quality assurance initiatives and inventory build ahead of new drug launches. We expect Hospira to generate ~$415 million in free cash flow in 2011.

  5. Raising estimates, but still below management's ‘goals’: We raise our 1Q sales and EPS estimates to reflect the Taxotere launch, but maintain our 2011 estimates. We raise our 2012 estimates slightly on a quicker recovery in the Specialty Injectable Pharmaceuticals (SIP) business. At 12% EPS growth in 2012, we are still below management's mid-teens growth goal as is the Street at 13%.

  6. We raise our price target to $66 to reflect more confidence in the growth profile. Our target is based on a 15x multiple applied to our 2012 non-GAAP EPS estimate, which is in-line with our EPS growth estimate over the next two years. Hospira's peer group of mid-cap healthcare companies is trading at a 2012 PEG ratio of 1.2x. Structurally, we believe that Hospira is better positioned than most of its peers to cope with a more challenging healthcare environment as its business is tethered to markets that should exhibit less pricing pressure.”

Source: Saut: Keep Accumulating Stocks With Favorable Risk vs. Reward Metrics