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.
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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