NEW YORK (TheStreet) -- Specialty drug company Endo International (ENDP - Get Report) has grossly underperformed its peers. With shares down 5.5% on the year to date, trailing the health care sector's 11% gain, according to Morningstar, Endo's management is under significant shareholder pressure. Shares trade close to $64. By contrast the S&P 500 is up 6% so far in 2014.
Investors are debating whether to sell out and movie on. Don't be in such a rush just yet.
Despite the stock underperformance, the Endo of 2014 is not the same company once known for chronically shooting itself in the foot. I believe in the next 12 to 18 months, patient investors will be rewarded with a stock that is 20% higher.
Despite the weak top-line growth (1% year-over year), the company's management, led by new CEO Rajiv De Silva, has adopted an aggressive growth strategy. This transformation has produced several accretive deals aimed at diversifying the business. All told, Endo is now well-positioned to seize significant market share in the next couple of years.
What's more, based on 2015 earnings estimates of $4.34, according to Yahoo! Finance, these shares are cheap trading at a multiple of 14. This is eight points lower than the industry average price-to-earnings ratio of 22. This puts Endo, which competes with Forest Labs (FRX and Teva Pharmaceuticals (TEVA - Get Report) , one of the few bargains left in this sector.
The company's recent $575 million deal for DAVA Pharmaceuticals is one recent example of how committed Endo has become to generating growth. Nevertheless, what I think is more important to consider is the extent to which Endo's generics business will be boosted by the 13 products DAVA already has on the market.
With more than five additional generic products set to hit the market in 2015, Endo, whose generics pipeline suddenly looks stronger, saw a deal it couldn't pass up. This means 2015 looks even more promising than current estimates suggest. For a business that is already growing at close to 20% year over year, the deal for DAVA, which should close later this year, is just what the doctor ordered.
In terms of the deal itself, at $575 upfront cash Endo is paying just six times trailing earnings before interest, taxes, depreciation and amortizatoin. These deals usually command an Ebitda multiple of eight times. So Endo is buying not only a highly profitable business but one that holds 30% market share in a drug called Methotrexate, which treats various forms of cancer. With this deal, Endo immediately surpasses both Teva Pharmaceuticals and Mylan (MYL - Get Report) , which command market share of 12% and 17%, respectively.
It's hard to ignore how quickly the new management team has turned around the company's fortunes. Assuming that DAVA adds, say, 40 cents to 50 cents per share in earnings in 2015, which is almost 13% accretion, Endo will emerge as one of the best health care stocks to own, if it's not already.
At around $64 per share, and a forward P/E of 14, Endo offers strong upside with minimal risk. There is still more work to be done, but this company is quickly building itself into a top-tier global specialty health care leader. With that year-to-date stock underperformance, there won't be a better time to buy.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates ENDO INTERNATIONAL PLC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate ENDO INTERNATIONAL PLC (ENDP) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. You can view the full analysis from the report here: ENDP Ratings Report