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Mylan: How Its Performance Contributed to Its Valuation

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What led to revenue growth?

In this final series of our three-part series, we’ll be looking at the last seven stocks among the top 18 cheap stocks in the S&P 500 for 2018. They include Mylan (MYL), Express Scripts Holding (ESRX), Viacom (VIAB), Signet Jewelers (SIG), Discovery Communications (DISCA), AES (AES), and Macy’s (M).

What led to growth in revenue?

Mylan’s (MYL) revenue rose 17% in 2016 and 11% in the first nine months of 2017. Third-party net sales and other revenue from North America, Europe, and the rest of the world drove growth in 2016. Intersegment revenue grew in North America and the rest of the world, offset by Europe.

Third-party net sales in Europe and the rest of the world and other revenue in Europe and other revenue from every segment drove the revenue for the first nine months of 2017, offset by third-party sales of North America. Intersegment revenue grew in North America, offset by Europe and the rest of the world. Growth in third-party net sales was associated with incremental royalty income from acquisitions.

How did diluted EPS perform?

Mylan’s gross profit rose 11% and 4% in 2016 and the first nine months of 2017, respectively. Operating expenses increased 45% in 2016 before decreasing 17% in the first nine months of 2017. The increase was due to higher litigation settlements and other contingencies in 2016. As a result, earnings from operations fell 52% in 2016 before growing 164% in the first nine months of 2017. An increase in interest expense was offset by a decrease in other expenses for those periods. After that, net earnings rose 19% in 2016 before falling 2% in the first nine months of 2017. Diluted EPS (earnings per share) rose 14% in 2016 before falling 5% in the first nine months of 2017. The company has managed to grow its positive free cash flow balance.

How does Mylan compare to its peers and the broad indexes?

MYL stock has risen 8.1% on a YTD (year-to-date) basis. The company has not declared any dividend. A forward PE (price-to-earnings) ratio of 9.2x compares to a sector average forward PE ratio of 3.8x and a dividend yield of 1.9%. The S&P 500 (SPX-INDEX) (SPY) offers a dividend yield of 2.2%, a PE ratio of 23.7x, and a YTD return of 19.8%. The Dow Jones Industrial Average (DJIA-INDEX) (DIA) has a dividend yield of 2.2%, a PE ratio of 22.3x, and a YTD return of 25.3%. The NASDAQ Composite (COMP-INDEX) (ONEQ) has a PE ratio of 25.4x and a YTD return of 29.4%.

What is Mylan’s outlook?

The healthcare sector will continue to be driven by aging demographics. However, if the Affordable Care Act is rescinded, it could lessen the demand for healthcare. Mylan’s revenue has been projected to rise 8% to $12 billion in 2017. It’s being projected to grow 6% to $12.7 billion in 2018. Diluted EPS is being projected to fall 7% to $4.54 in 2017. It’s expected to rise 18% to $5.34 in 2018.

The VanEck Vectors Generic Drugs ETF (GNRX) has exposure to MYL. It has a PE ratio of 30.2x and a dividend yield of 1%. The SPDR S&P Pharmaceuticals ETF (XPH) has exposure to Mylan. It has a PE ratio of 12.1x and a dividend yield of 0.7%.

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