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Jim Cramer's Action Alerts PLUS

Why Actavis Shares Are Underperforming

By Jim Cramer and Jack Mohr | 06/03/15 - 11:57 AM EDT
Stocks in Focus: ACT

This morning, analysts at Raymond James initiated coverage of Actavis (ACT:NYSE) with an "Outperform" rating and a $344 target price (about 13% upside). Despite this vote of confidence, shares of ACT are underperforming in today's trading session. After much thought, we would like to take a brief moment to explain to our subscribers why we believe this is the case.

There are a few reasons shares of Actavis are struggling to charge higher. The first reason is that the sell-side is universally bullish on this name, therefore rendering incremental analyst bullishness (in the form of "buy" initiations and upgrades) less meaningful. We acknowledge that being universally loved by the sell-side is more often than not a contrarian signal, but since absolute and relative valuations remain quite attractive, and estimate trends still have an upward bias, we believe the case of Actavis is unique.

The second reason shares of Actavis have been subdued is the perceived lack of visibility into the company's "aspirational" 2017 EPS target of $25. Despite management's track record of beat-and-raise performances, the Street hasn't quite bought into the company's 2017 aspirational target and remains 7% below the $25 figure.

We believe that as the company continues to deliver above-and-beyond expectations over the coming quarters, the line of sight to $25 becomes more and more a reality, therefore forcing analysts to raise their estimates while simultaneously driving multiple expansion to $16.5-$17.5 forward EPS, versus 14.6x currently.

We have tremendous confidence in Actavis' ability to deliver on that $25 EPS figure, and in fact believe the company could exceed that target, potentially getting to $27 EPS. Regardless, we feel that the stock's current valuation is far too low, as shares trade at a 10% discount to both the large pharma multinationals and pure generics, and a healthy 15% discount to comparisons among pure specialty pharma plays. On a P/E-to-growth basis (PEG), ACT trades at just 0.9x its current forward P/E relative to three-year estimated EPS growth vs. 50-100% premium PEG valuations for relevant pharma peers. Our target remains $350.

Regards,

Jim Cramer, Portfolio Manager & Jack Mohr, Director of Research - Action Alerts PLUS

DISCLOSURE: At the time of publication, Action Alerts PLUS was long ACT.

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JNJ 3.46% Drugs
MMM 3.69% Industrial
OXY 2.73% Energy
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