For investors concerned about the macroeconomy, biotechnology provides some of the safest plays. The Street is particularly bullish about Endo Pharmaceutical (ENDP), Mylan (MYL), and Johnson & Johnson (JNJ). Endo is most preferred with the near "strong buy" rating. Based on my multiples analysis, review of the fundamentals, and DCF model, I find the strongest upside at Mylan.
From a multiples perspective, Endo is the cheapest of the three. It trades at a respective 18.2x and 6.7x past and forward earnings while Mylan and J&J trade at a respective 8.8x and 12x forward earnings. J&J, however, offers the highest dividend yield at 3.5% and by far the biggest brand. With that said, outlook has worsened for the firm.
In contrast, at the third quarter earnings call, Endo's CEO, Dave Holveck, noted solid performance:
Endo had a strong third quarter, with record revenues of $759 million and adjusted diluted earnings per share of $1.25. These results reflect our continued focus on integration of our newly acquired businesses, solid demand for our products and our commitment to financial discipline and debt reduction.
Our core business has continued to grow and perform well, with strong contributions from OPANA ER, Voltaren Gel and LIDODERM. Sales of branded and non-promoted drugs in our legacy business rose 17% year-over-year. Our acquisitions have added growth and created substantial diversification for our company.
As much has Endo has had solid performance, I am even more optimistic about Mylan. The company recently gained approval to launch generics against Tropol XL. gTropol XL was a previously nice surprise approval. Myaln further had strong momentum in both the top- and bottom-lines during the third quarter with the former up by 16% from one year ago. Notable performance was experienced in Dey Pharma, which remains a major catalyst going forward. Dey Pharma further had the validity of its Performorist patents reaffirmed. (The re-examination was requested by Sunovian Pharmaceuticals.) Add in greater R&D within this context and you have some promising upside.
Consensus estimates for Mylan's EPS forecast that it will grow by 24.8% to $2.01 in 2011 and then by 18.9% and 9.2% more in the following two years. Assuming a multiple of 15x and a conservative 2012 EPS of $2.31, the rough intrinsic value of the stock is $34.65, implying substantial upside.
J&J, on the other hand, recently issued 2012 guidance that was below consensus. Fourth quarter results were only in-line with expectations due to a lower tax rate and non-recurring divestures. Medical devices & diagnostics, Consmer, and Pharma gained 2.4%, 2.7%, and 6.6% respectively in terms of revenues. While I like the focus on R&D, the Synthes deal is going to be dilutive to near-term EPS when it closed sometime in the first half of this year. At the same time, free cash flow yield is markedly improving and is capable of doubling by 2013. In addition, leverage is declining as cash holdings rise while debt holds flat.
Consensus estimates for J&J's EPS forecast that it will grow by 2.6% to $5.13 in 2012 and then by 6.4% and 8.2% more in the following two years. Modeling a CAGR of 5.7% for EPS over the next three years and then discounting backwards by a WACC of 9% yields a fair value figure of $75.58, implying 15.5% upside.