Another government intervention. Another trade for The FastCap Strategist. This time, we’re going to take advantage of a combination between a strong and growing business and Obama’s emphasis on healthcare reform.
Here’s how…
A drug patent lasts for 20 years (though some of that is eaten up by FDA approval and such). After that it can be manufactured by anyone as a generic version. This allows the drug creator to benefit, but not have an indefinite monopoly.
Healthcare reform, whatever ends up being passed, will feature an emphasis on encouraging patients to select generic drugs when possible… and for good reason.
Experts agree that generics give the exact same benefits as brand name medications and cost about 70% less.
Right now, 10,072 of the 12,751 drugs listed with the FDA have generic alternatives available. Generic medications account for 69% of all prescriptions dispensed, but only 16% of dollars spent.
And still, the generic industry is growing at over 7.8% per year, outpacing the general pharmaceutical market.
So let’s jump in with a small-cap generic manufacturer, Perrigo Company (Nasdaq: PRGO).
As our strategy dictates, Perrigo recently surprised on earnings, revenue and raised guidance. And I’ve determined the recent numbers to be indications of an undervalued business overall.
Perrigo manufactures and markets roughly 250 generic prescription medicines. Perrigo also makes raw active ingredients for sale to other generic manufacturers though its Chemagis division. This gives Perrigo a steady revenue stream and makes it a broader play on the generics industry at large.
Finally, the company also produces over-the-counter consumer products, like store brand ibuprofen, generic NyQuil, decongestants like Sudafed (a $4.5 billion industry by itself) and so on. (Perrigo covers 15 different categories and 500 formulations.)
And don’t think that more people aren’t reaching for the $6 acetaminophen tablets over the $9 Tylenol in this recession. In the last year, revenue from this division alone rose 22% to $1.6 billion. And despite being “low-cost” generics, they sport a 28% profit margin on average.
Since 2005, Perrigo has doubled sales from $1 billion to $2 billion and gone from losing money to a net income of $141 million – growing through both acquisitions and the addition of new products. The balance sheet sports $256 million in cash and only $825 million in long-term debt.
Before I make an investment in healthcare, I always check with Marc Lichtenfeld, Senior Analyst and biotechnology expert at Mount Vernon Research, who says, “As government and private insurers look for ways to lower healthcare costs, well run generic drug companies should continue to perform well. And Perrigo is clearly a well run company.”
That’s good enough for me.
I’ll provide some more details on Perrigo’s outlook in our next issue, but for now, let’s not wait any longer.
Action to Take: Buy Perrigo Company (Nasdaq: PRGO) for $40 or less. Place your sell stop at $33.
An Update on Our Current Positions
On November 2, I came out with our first FastCap Strategist issue recommending Cytec Industries (NYSE: CYT) and MSC Industrial (NYSE: MSM) under $31 and $42, respectively.
However, both stocks promptly took off without reaching my designated “Buy” prices.
I’ve done a full work up on both of them (again) to see what prices we can justify. Today’s been a down day in the market, giving us an opportunity to get in a little cheaper, so here’s what we’re going to do.
For MSC Industrial raise your limit price to $46.25. Unless prices move sharply before this reaches you, that should allow you to get in. If you miss it, leave the order open for a few days and see if we can get another dip.
For Cytec Industries raise your limit price to $33.50. Cytec is still at $35 now, so we’ll still be waiting on that one. We’ll give it another week or so before we move on from it.
If you’re new to The FastCap Strategist, you can read the full issue by clicking here.
Meanwhile, we were up about 10% in under a week on Power Integrations Inc (Nasdaq: POWI) before Bank of America downgraded it today. As always, we’re not very concerned with Bank of America’s opinion on the company, but it did move the stock a bit. We’re still profitable, so keep holding.
Ahead of the tape,
Matthew Weinschenk