(By Michael Vodicka) When a company's earnings and earnings estimates jump higher but shares fail to respond due to general market weakness, opportunity is at hand. And that is exactly what is happening with one of my favorite stocks out of the healthcare sector right now.
The company in question is Valeant Pharmaceuticals International, Inc. (VRX), a pharmaceuticals specialist that develops, manufactures and markets pharmaceutical products in the areas of neurology, dermatology and branded generics. The company is also very international, serving market across the world that includes the United States, Canada, Australia, New Zealand, Europe, Latin America, Southeast Asia and South Africa.
With a market cap of $14 billion, Valeant is smaller large cap that pales in size compared to some of the bigger names in the industry like Pfizer Corp. (PFE), with a market cap of $167 billion and Merck & Co., Inc. (MRK), valued at $126 billion.
In spite of four consecutive earnings surprises and bullish upward movement in earnings estimates, shares of Valeant are actually trading lower on the year, currently down 7% compared to the S&P 500's 6% gain. Take a look at the chart below.
VRX vs. S&P 500-2012 YTD
But that weakness has more to do with general market conditions that company specific issues, coming on the heels of a sharp turn in the market that began in late April and continued into early June that punished many individual stocks.
And with earnings looking strong and earnings estimates heading higher, this is a rare opportunity to buy a growth stock at a temporary discount to both historical valuations and its peers, because there are more than a few reasons to be bullish on Valeant.
The Bullish Case
Valeant continues to successfully grow by acquisition, effectively integrating third-party businesses that are making big contributions to both the top and bottom line. In its most recent quarterly results from May 3, 43% of the company's amazing 54% revenue growth came from acquisitions while organic revenue growth came in at 11%. Looking forward, Valeant's pace of acquisitions will probably slow a bit due to recent activity, but that will also give the company an opportunity to focus on further integration and operational synergies between new products and divisions.
Valeant will also continue to pursuit new opportunities in high-growth, emerging markets, where it is already seeing strong results. During the first quarter, international markets and emerging-markets were a strong driver of growth, with Latin-American sales up 19% from last year and South East Asia/South Africa sales up 9%. Even the company's Europe operations held up well in spite of high levels of volatility and uncertainty, with sales jumping 10%.
In just 2012 alone, Valeant has entered into 11 new transactions. In Latin America, it inked deals with Probiotica, a sports nutrition and supplement company and Pele Nova Biotecnologia S.A., a research company that specializes in tissue regeneration, both located in Brazil. And in the United States, Valeant has closed multiple deals that include Eyetech, Inc., a biotech that specializes in treating sight disease and Pedinol Pharmacal, Inc. a podiatry-focused pharmaceutical company.
Estimates and Valuation
The company's strong Q1 results from early May and more deal activity has made the analysts more bullish, pushing estimates higher. The full-year 2012 estimate is up 7% to $4.43, an impressive 62% growth projection from last year. The full-year 2013 estimate is up 6% in the same time, climbing to $4.94, another solid growth projection of 12%.
That bullish movement in estimates paired with a recent down turn in shares has created a compelling value opportunity. As it stands, Valeant trades with a price-to-earnings growth ratio (PE/G) of just .55 times, a discount to the 10-year median of .63 times and well below the all-time high of 13.6. But what's even more interesting is that in spite of the company's bullish growth projection, the drugs market trades with a PEG ratio of 1.66 times. Returning to just the average valuation for the industry would have Valeant trading above $135, a sharp 200% plus gain from current levels.