PRGO - Perrigo Company plc Is Back On Track

Summary

• Uncertain outlook prompts stock market investors to seek protection.
• US-listed stocks of loyal dividend payers with robust activity also serve as effective hedging tools against market headwinds.
• Among US-listed dividend payers, Perrigo Company plc stands out in better shape after reorganization.
• The stock could indeed get cheaper due to bearish market sentiment.

Uncertainty About the Outlook Sparks Problems in the Stock Market and Prompts Investors to Seek Protection

Geopolitical issues, the war in Ukraine, tensions between the US and China over Taiwan, risky monetary policy to curb inflation and sky-high energy prices make the future of the global economy look very uncertain now.

These multiple factors create strong headwinds in the publicly traded equity markets, against which classic safe-haven assets such as precious metals or bond yields or the appreciation of the US dollar can offer good protection.

In addition to these assets, loyal dividend payers with robust activity among US-listed stocks can also serve as effective hedging tools against market headwinds.

Perrigo Company plc (PRGO) appears to be able to offer protection with the possibility of getting cheaper given the current bearish market sentiment. So, this stock is worth a closer look.

Perrigo Company plc

Ireland-based Perrigo Company plc is a leading supplier of generic pharmaceuticals to the US and European over-the-counter [OTC] markets.

The company offers traditional OTC medicines in categories such as cough, cold, allergy problems, pain relievers and oral and skin care products, among a few others.

As of 2021, Perrigo Company plc is a 100 percent OTC consumer healthcare company, having divested other businesses in recent years.

The transformation is also due to a recent acquisition.

Under a binding offer signed in September 2021, Perrigo Company plc was to acquire Héra SAS [HRA Pharma], a global leader in OTC consumer self-care products, specifically in the areas of blister care, women's health and treatments for scar care, for a total consideration of approximately $2.1 billion, payable in cash. The transaction closed on April 29, 2022.

The objectives of the transaction were as follows:

1. Complete the transformation process of Perrigo Company plc into a global leader in products for consumer self-care.
2. Increasing Perrigo Company plc's presence in the European OTC markets, which have been pointed out as having great potential for growth.
3. Become more resilient not only from an operational perspective but also from a financial perspective.

The acquisition of HRA already had a positive impact on the pro forma gross margin of Perrigo's Consumer Self-Care Americas [CSCA] in the second quarter of 2022 . It rose 290 basis points [bps] sequentially to 27.9%, also thanks to the contribution of HRA with a jump of 80 bps.

Encouraging Trends Following Business Reorganization

Overall, the second quarter of 2022 was decent for Perrigo shareholders. Revenue, gross margin, and earnings per share ((EPS)) showed an encouraging improvement compared to the previous quarter, thanks to the strong demand for consumer self-care products seen not only in the US but also abroad during the period.

The second quarter of 2022 followed a period of business reorganization, which was not without issues for some of the financial metrics of Perrigo. This period certainly hasn’t been the easiest for Perrigo shareholders, as so much has happened to impact the stock price.

Some of these events were related to Perrigo's business restructuring, which included several divestitures as part of its evolution into a global leader in consumer personal care products. This transformation has been at the center of broader events of the recovery from the COVID-19 virus pandemic and the US Federal Reserve's efforts to rein in runaway inflation, which have created severe headwinds for Perrigo's share price and many other US-listed stocks.

While the war and feared global recession have rocked the market over the past 9 months, the company's restructuring has also impacted the share price as its implementation has not been entirely gentle on Perrigo's gross profit margin, as shown in the table below.

Such a corporate event, which inevitably involves costs that outlast some sales for a while, results in a temporary deterioration in gross profit margin.

However, assuming that gross profit margin is a very eloquent indicator of the quality of sales, albeit purely synthetic, its slight decline, in this case, shouldn't sound like an alarm if Perrigo's stock price had fallen under the metric's leadership.

The Stock Hasn't Fared Badly to Withstand the Impact of Some Repeated Declines in Gross Margin

It must be said, however, that Perrigo shares were not a total disappointment when compared to the overall stock market, represented for this purpose by NASDAQ HealthCare (^IXHC), as illustrated in the chart below.

Despite all the headwinds in the market since the reorganization, Perrigo has fallen, but at a much slower pace than the market. The market has enough confidence in what the reorganization of the Perrigo business will bring in terms of greater operational resilience with a strengthening of the financial position, two fundamental aspects for the ongoing payment of dividends.

Regarding the first aspect, the chart below may indicate that the uptrend in gross profit margin may have resumed. This would be a very important outcome for Perrigo's profitability and could be a powerful catalyst for higher share prices when the market finally turns positive.

The improvement in overall sales and organic sales are very encouraging signs for those expecting more dividend increases in the future. Payment of dividends assumes that the company's long-term financial conditions remain favorable.

A better financial position, perhaps through deleveraging amid rising borrowing costs, should follow the board's careful use of profitability, which the following trends also suggest may be on the way to further improvement.

Over an extended period of six months to the second quarter of 2022, Perrigo Company plc's business performed as follows.

The company has sold products for total revenue of $2.2 billion , up nearly 15% year over year excluding currency effects. This was mainly due to a good year-over-year improvement in organic sales of more than 13%.

By region, the sale of consumer self-care products in America has generated sales of $1.4 billion , or about 65% of total sales, while overseas sales have generated $758 million, or about 35% of total sales.

The Americas segment saw 15.8% organic revenue growth, while the overseas business saw 9.1% organic growth.

About the Dividend and the Financial Position

On September 20, 2022, the company paid a quarterly dividend of $0.26 per common share, resulting in an annual payout [FWD] of $1.04 and a dividend yield [FWD] of 2.60% as of this writing.

The payout ratio is 55.25% , which means that after 18 years of dividend growth at a pace of 10.29% per year over the last 5 years, there's still room for dividend improvement if the company so desires.

The current financial situation appears poised to support a project of eventual dividend increases as annual operating income [$158.3 million for 12 months ending July 2022] exceeds interest expense [$137.9 million for 12 months ending July 2022] for the time being.

The latter relationship means that the strong borrowing pressure [ $4.33 billion in borrowing exceeds $490.4 million in cash by nearly nine times] currently is not an issue.

The Company's Outlook Provides for Continued Organic Sales and Earnings Improvement

Looking ahead to the full year of 2022, the company expects organic net sales to continue to grow at a rate of 9.0% to 10.0% versus a growth range of 8.0% to 9.0% in 2021, as global consumer demand should remain strong this year as well.

Total net sales growth is expected to fluctuate in the range of 8.5% to 9.5% versus a more optimistic consensus growth of 9.70% year over year as the company believes organic sales growth should not be enough to offset the negative impact of a stronger US dollar on foreign markets.

At constant exchange rates, pro forma EPS per diluted share is expected to be no less than $2.40 and no more than $2.50 per diluted share [16.5% to 21.4% jump from 2021] versus a consensus of $2.31 .

The Share Price Continues to Face Headwinds

The stock was trading at $39.88 per share as of this writing for a market cap of $5.29 billion and a 52-week range of $31.32 to $47.95.

The share price is trading above the middle point of $39.63 of the 52-week range and above the long-term trend of the 200-day simple moving average of $38.48.

The non-GAAP ((TTM)) P/E is 22.12 versus the industry median of 17.85 and the price-to-sales ((TTM)) ratio is 1.24 versus the industry median of 4.28 .

Given these indices and comparisons to current price levels, the stock doesn't seem expensive for those interested in this healthcare stock, which looks better after the company’s reorganization.

Ongoing organic sales, profit margins, and eventual additional dividend increases are the growth catalysts to follow.

However, the market headwinds are not over and could persist for some time, impacting Perrigo and other US-listed stocks as the economy is expected to enter a recessionary phase. These fears of a sharp slowdown in economic activity are fairly ingrained factors, so lower stock prices have a good chance of materializing going forward.

Conclusion - The stock Will Recover, but Until the Bear Market is Over, It Could Fall from Current Levels

Perrigo's business is unlikely to be directly impacted by a recession as its products are always characterized by robust demand, but investors are less inclined to take on greater investment risk in financial markets during a recession and this may harm shares.

Perrigo operates a business that could be impacted by post-pandemic supply chain disruptions or reduced demand for cough/cold products when the use of mouth masks and implementation of restrictions and lockdowns, to prevent the spread of COVID-19, also reduce the risk of flu and cold infection. But these supply chain disruptions and the consequences of lockdowns and restrictions are currently in the process of being finally resolved.

Demand for cold/flu and other consumer self-care products is unlikely to be affected by a deterioration in economic conditions around the world, as everyone strives to stay healthy in both bad and good economic times.

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