PRGO - The Prognosis For Perrigo

2023-08-30 15:08:08 ET

Summary

• Perrigo Company plc provides over-the-counter health and wellness solutions after recently divesting its prescription businesses.
• Perrigo stock is reasonably valued at under 14 times forward earnings with a 3% dividend yield.
• Time to Buy, Sell, or Hold?  An analysis follows below.

Where there is power, there is resistance ."? Michel Foucault.

Today, we put Perrigo Company plc ( PRGO ) in the spotlight. The company appointed a new CEO in June of this year and recently garnered a couple of new FDA approvals. In recent years, the company has restructured its portfolio of brands and shifted focus away from prescriptions and toward being a fully self-care company with the acquisition of several self-care brands. Perrigo also sold off its dermatological business for $1.5 billion in 2021 and has made several smaller divestitures since.

Perrigo Company plc shares seem reasonably priced with a three percent dividend yield to boot. In the ' buy zone '? An analysis follows below.

Company Overview:

Perrigo Company plc is headquartered in Dublin, Ireland and provides over-the-counter health and wellness solutions in the consumer self-care category. Some of its products include Burt's Bees, Compeed, Dr. Fresh, Firefly, Good Sense, Mederma, Nasonex, Plackers, Prevacid 24HR, REACH, Rembrandt, and Steripod. Perrigo also offers contract manufacturing services.

The company recently won approval for an over-the-counter birth control pill called Opill as well as for a Nicotine Coated Mint Lozenge to aid in smoking cessation that will now be available over the counter. Late last year, Perrigo acquired a plant and facilities from Nestle ( NSRGY ) for $170 million to ramp up its baby formula production, the lack of baby formula was a headline issue in 2022 as it highlighted the problems of the global supply chain last year. The stock currently trades around $36.00 a share and sports an approximate market capitalization of just under $5 billion.

Second Quarter Results:

The company reported second quarter numbers on August 8th. Perrigo had a non-GAAP profit of 63 cents a share in the quarter, 12 cents ahead of the consensus. Revenues grew just over nine percent on a year-over-year basis to $1.2 billion, $20 million north of expectations. The company made good progress on the margin front as well.

Net sales only grew .8% from Q2 2022, which included a negative 2.7% impact from the company's SKU prioritization efforts to enhance margins which is dubbed the " Supply Chain Reinvention Program ." This initiative is primarily due to the expansion of its infant formula business enhanced via the Nestle facility acquisition.

For the current fiscal year, management guided that organic net sales would rise between three and six percent, while overall sales are expected to increase between seven and 11% compared to FY2022.

Analyst Commentary & Balance Sheet:

Despite being a midcap concern, Perrigo gets little coverage from Wall Street, primarily because of its overseas headquarters. JPMorgan reiterated its Buy rating and $48 price target on PRGO after second quarter results came out. In March, Raymond James maintained its Buy rating and $43 price target on the stock while Canaccord Genuity initiated the shares as a new Buy with a $49 price target.

Approximately four percent of the outstanding float in the shares is currently held short. The previous CEO disposed of just over $7 million in his stake on May 11th of this year. Other than that, insider sales and insider purchase have roughly equaled in 2023.

The company ended the second quarter with approximately $555 million in cash and marketable securities on its balance sheet after delivering $53 million in operational cash flow during the quarter. The shares currently yield three percent, and the company paid out $37 million in dividends in the second quarter. The company raised its dividend payout by five percent this February.

Perrigo has long-term debt of roughly $3.5 billion. Management is committed to reducing that debt load over time, and estimates that interest expense needed to service this debt will be approximately $180 million in FY2023. At the end of the second quarter, Perrigo had a 5.1x net debt-to-adjusted EBITDA ratio compared to 5.5x at the end of FY2022.

Verdict:

Perrigo made $2.07 a share in profits in FY2022 on $4.45 billion in revenue. The current analyst firm consensus has Perrigo hitting $2.61 a share of earnings in FY2023 as revenues rise to $4.82 billion and $3.11 a share in FY2024 on just over four percent sales growth.

Perrigo Company plc currently trades at just under 14 times forward earnings, a more than reasonable valuation given its growth prospects and 3.0% dividend yield. Reasonable, but not greatly compelling given the uncertain nature of the overall market. The stock has also been range-bound over the past year. If the stock pulls back nearer its floor of $32 to $33 a share in an overall market decline, that is where I would start to build a position in Perrigo Company plc.

People don't resist change. They resist being changed ."? Peter Senge.

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