It's Time To Take Profits On Allergan

Summary

• After the strong performance in the last two months and a 25% move off its lows, a valuation check suggests that the risk/reward is now much less compelling.
• DCF Analysis shows that Allergan is undervalued by only 13% (Perpetuity Growth Method) and 4% (EBITDA Multiple Method).
• A Sum-Of-The-Parts (SOTP) approach suggests the company is undervalued by only 10%.
• Allergan is no longer trading at discount to its 5 year average historical P/E on an absolute and relative basis.
• Thus, I would take some profit on the stock, waiting for a better entry point later in the year.

I've discussed Allergan's (NYSE: AGN) various businesses from a qualitative and quantitative prospective, and it’s clear that I like the company’s long-term strategy and its presence in the aesthetics market.

I believe Allergan is one of the best positioned companies in the pharmaceuticals space and worthy of long-term investment. However, I think some profit-taking on the name would make sense at this time.

In fact, after the strong performance in the last two months and a 25% move off its lows, a valuation check suggests that the risk/reward is much less compelling than few months ago.

Thus, in this article, I will go through three valuation approaches — DCF, sum-of-the-parts (SOTP), and multiple comparison — to demonstrate why I believe it’s time to take profits in Allergan.

DCF Valuation

I discussed here the methodology behind my DCF Valuation for Allergan. In this article, I update my analysis on the basis of the announcements of FY 2016 Results and of the recent acquisition of ZELTIQ.

Here are my key assumptions for the estimates of Sales, EBITDA Margin and FCF:

Source: Bloomberg & My Own Valuation Model

As you can see, these estimates are below consensus. Specifically, I assume a lower EBITDA margin compared to sell-side estimates for 2019-2022, because I think the Street has overlooked the profitability dilution from the recent acquisition of ZELTIQ.

Source: Consensus Comparison vs. My Own Valuation Model

To generate a DCF Analysis, I used 2 different methodologies:

• PERPETUITY GROWTH METHOD: I used conservative assumptions about the perpetual growth rate and the WACC. In details, I used a perpetual growth rate of 1%, which is lower than Bloomberg assumption (i.e. 2%) and I assumed a WACC of 7.5%, that is higher than the Bloomberg estimate (i.e. 7%).

Source: Bloomberg

As can be seen in the table above, Allergan

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Not investment advice. I am not an investment adviser.