From an investor’s point of view, the two best valuation multiples used for valuing companies like Allergan are the forward PE (price-to-earnings) and EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples, considering the relatively stable and visible nature of their earnings.
The above chart shows a comparison of actual and estimated EPS (earnings per share) over the last few quarters. The company missed analysts’ EPS estimates during 3Q16. It reported EPS of $3.22—compared to the estimated EPS of $3.58 for 3Q16.
Forward PE multiple
PE multiples represent what one share can buy for an equity investor. As of November 29, 2016, Allergan (AGN) was trading at a forward PE multiple of ~12.1x—compared to the industry average of 14.4x. Over the past year, the company’s forward PE multiple traded in the range of 13.2x–20.0x. The company is trading at a higher PE multiple than its competitors like Mylan (MYL), Perrigo (PRGO), and Lannett (LCI). They trade at 6.9x, 11.8x, and 7.1x, respectively.
Forward EV-to-EBITDA multiple
On a capital structure neutral and excess cash-adjusted basis, Allergan currently trades at ~10.2x, which is higher than the industry’s average of ~9.6x. Other competitors such as Perrigo, Mylan, and Lannett have forward EV-to-EBITDA multiples of 11.4x, 8.3x, and 5.8x, respectively.
According to the data on November 28, 2016, Allergan’s stock value fell more than 40% over the last 12 months. Analysts estimate that the stock has the potential to return ~39.5% over the next 12 months. Analysts’ recommendations show a 12-month targeted price of $265.11 per share—compared to the last price of $189.99 per share as of November 28, 2016. Also, 78% of the analysts recommend a “buy” and 22% recommend a “hold.” Changes in analysts’ estimates and recommendations are based on changing trends in the stock price.
Investors can consider ETFs like the iShares S&P Global Health Care ETF (IXJ) in order to divest the risk. IXJ has 2.2% of its total assets in Allergan.