Understanding Allergan’s Valuation after the 1Q17 Results
From an investor’s point of view, the two best valuation multiples used for valuing companies like Allergan (AGN) are the forward PE (price-to-earnings) multiple and the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple, considering the relatively stable and visible nature of Allergan’s earnings.
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The above chart shows a comparison of Allergan’s actual and estimated EPS (earnings per share) over the past few quarters. The company surpassed the analysts’ estimates for EPS in 1Q17, reporting $3.35 per share, as compared to the estimate of $3.30 per share.
PE multiples represent what one share can buy for an equity investor. On May 10, 2017, Allergan (AGN) was trading at a forward PE multiple of ~14.1x, as compared to the industry average of 11.9x. Over the past year, the company’s forward PE has traded in the range of 13.2x–18.6x. By comparison, peers Mylan (MYL), Perrigo (PRGO), and Lannett (LCI) are trading at forward PE multiples of 7.0x, 15.3x, and 7.6x, respectively.
On a capital structure neutral and excess-cash-adjusted basis, Allergan currently trades at ~12.9x, which is higher than the industry’s average of ~10.0x. By comparison, peers Perrigo (PRGO), Mylan (MYL), and Lannett (LCI) have forward EV-to-EBITDA multiples of 13.6x, 8.2x, and 6.3x, respectively.
As of May 10, 2017, Allergan’s stock value has risen ~11.6% during the past 12 months and 13.6% YTD (year-to-date) in 2017. Analysts estimate that the stock has the potential to return ~15.4% over the next 12 months. Remember, changes in analysts’ estimates and recommendations are based on changing trends in the stock price.
The analysts’ recommendations show a 12-month targeted price of $275.32 per share, as compared to its last price of $238.51 per share on May 9, 2017. Of the 20 analysts tracking Allergan stock, 75% of the analysts have recommended a “buy,” while 25% have recommended a “hold.” The consensus rating for Allergan stands at 1.95, which represents a moderate “buy” for both long-term growth investors and momentum investors.
To divest risk, investors can consider ETFs like the PowerShares Dynamic Pharmaceuticals ETF (PJP), which has 5.3% of its total assets in Allergan.
For ongoing updates on Allergan and this industry, keep checking in with Market Realist’s Pharmaceuticals page.