We often see the word “coup” used as a military term. You may remember the unsuccessful coup d’etat attempt against Turkish President Recep Tayyip Erdoğan’s government in July 2016.
However, the word also means a “brilliant, sudden and usually highly successful stroke or act.”
A health care company pulled off an investing coup in 2016.
I believe it should be on your radar today.
Read on to learn why…
A Trusted Health Care Brand
Dublin-based Allergan (NYSE: AGN) is downright cheap. It could generate 30% to 40% returns over the next year.
One reason is the company’s stellar management.
Allergan engineered a coup in 2016 when it sold its generic drug business to Israel-based Teva Pharmaceuticals for $40 billion.
Allergan earned top dollar while reducing its exposure to the competitive generic drug industry. It wanted to focus on its more lucrative branded drug and therapy portfolio. Teva — by the way — has since written off billions of dollars from this deal because it paid too much.
Allergan’s portfolio includes Botox. In addition to its cosmetic uses, doctors prescribe Botox for overactive bladders, headaches, muscle stiffness and other common issues.
Allergan sold more than $3 billion of these products last year (total sales were almost $16 billion). And the company’s scientists continue to find new uses for them.
The other reason I’m interested is because the stock is cheap. Take a look at its chart:
Botox is a part of the reason for this weakness. Recent headlines report Allergan’s peers are trying to develop products to compete with Botox.
This isn’t a surprise, though. It’s how the pharma business works.
Botox has been so successful for so long that Allergan’s peers want a piece of the action.
However, these peers still have to develop products. That will take time … and luck. And those who already have products have had limited success to-date.
Allergan also continues to benefit from the fact the market is growing. People want to look and feel better … and they can trust this brand.
A Tremendous Value
Health care in general has been weak, too. President Donald Trump has made negative comments about health care companies.
In addition, the joint statement on January 30 from Amazon’s Jeff Bezos, Berkshire Hathaway’s Warren Buffett and JPMorgan’s Jamie Dimon worried investors in these stocks. The three CEOs are forming a firm to provide a better health insurance option for their U.S. workers. The market worries the new firm will extend its offerings to the rest of the market, thus reducing profits for current players.
Regardless of this, there is tremendous value in Allergan shares at this price.
The stock is cheap. Per Bloomberg, Allergan is the only large-cap health care stock that trades on a U.S. exchange with a price-to-book ratio less than 1.
In fact, it has never been cheaper. Allergan’s current price-to-book value is 0.72. It is trading at a 28% discount to the value of its net assets. Per Bloomberg, the stock has never traded so low.
And business is improving.
EBITDA — Earnings Before Interest, Taxes, Depreciation and Amortization — is a common financial metric. Analysts use it as a proxy for operating profits. Allergan’s EBITDA more than doubled last year.
Further, Allergan has taken advantage of the huge inflow of cash from the Teva sale and its regular business to improve its balance sheet.
Debt is down to $30 billion. It was more than $44 billion three years ago.
Share count is down, too. The company has been buying back shares to take advantage of its temporary value status. Allergan has bought back more than 65 million shares, or more than 16% of the total since the Teva deal closed.
Allergan pays a $2.88 dividend, too. It just increased it by almost 3%. Shares yield 1.9% at the current price.
How to Buy Into the Uptrend
We still want to be careful, though. Even though these numbers look great, Allergan’s recent price trend means this is a speculative play.
Shares have begun to move up a bit. I recommend confirming this uptrend continues before you buy. That would add support to the strength of the recent uptick … and the likelihood it continues.
Good investing,
Brian Christopher
Senior Analyst, Banyan Hill Publishing
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