Pharmaceutical companies that sell generic drugs are trading at attractive valuations, offering investors a nice entry point, writes Bernstein Research analyst Aaron Gal in upgrading shares to Outperform. Watson is a little more expensive than rivals Teva Pharmaceuticals (TEVA) and Mylan (MYL), but is still “cheap” at 8 times 2014 earnings expectations.
Watson Pharmaceuticals (WPI) “looks like a solid grower in the next two years,” Gal writes. Most importantly, WPI agreed to buy Swiss rival Actavis earlier this year, bolstering its presence in Europe. That could give the company’s earnings a jolt.
“Assuming minimal internal growth of both Watson and the acquired business, Watson could grow its net income by $542M by 2015. Assuming the $542M are perpetuity and discounting it to present at a 5% rate suggests the deal will generate 67% return on investment. We note that applying a higher discount rate would make this deal unattractive with the value of the deal going negative between 7%-8% (it is amazing how much the current interest environment is altering economic incentives).”
No comments:
Post a Comment