Why It's Time for Allergan Shareholders to Take Some Profits

NEW YORK (TheStreet) -- Shares of Botox maker Allergan (AGN) have soared by as much as 60% in 2014. More than half of those gains have come since Bill Ackman's Pershing Square Capital Management and Valeant Pharmaceuticals (VRX)  announced their interest in buying Allergan.

Allergan investors have done well, but this would have been the case even without the added M&A boost from Pershing Square and Valeant. Prior to Valeant's bid was made public in April, Allergan shares were up already close to 22%.

It's now time to take some money off the table.

Not only does the stock, at close to $170, trade at a considerable premium to its peers at present, it's become less likely that another company will step in and outbid Valeant. This may be as as good as it's going to get for Allergan shareholders.

Up almost 53% for the year to date as of Tuesday, Allergan stock is now trading at price-to-earnings ratio of 41, which is 20 points higher than the industry average, according to Yahoo! Finance. Meanwhile, Johnson & Johnson (JNJ) and Novartis (NVS) carry multiples of 20 and 24, respectively.

On a forward-looking basis, Allergan shares aren't any cheaper. Based on 2015 earnings estimates of $8.23, according Yahoo! Finance, the stock carries a multiple of 20, compared to 16 for Johnson & Johnson.

Allergan investors are paying for growth. With the company posting 16% year-over-year jump in revenue in the most recent quarter, Allergan has not disappointed. Still, the company pays a yield of only 0.10%, which 2.70% and 3.0% less than Johnson & Johnson and Novartis, respectively.

So while the revenue results may be solid and margins are steadily improving (up more than half a point year over year), investors are still paying too much for the earnings they're likely to get. The question investors must ask is, how much more value can Allergan extract from internal operations?

Allergan recently unveiled a cost-cutting program that will save the company almost $500 million, which now has the company on track to deliver $10 per share for 2016. It would be an impressive accomplishment if it becomes true -- $10 per share would be roughly $2 better than prior estimates, according to Yahoo! Finance.

The company's ability to achieve this goal is not a guarantee, however. There are always execution risks, including competitive threats, and 2016 is not exactly around the corner. Market dynamics may change and force Allergan to alter these plans, most of which are already priced into the stock. The current dividend does not pay enough for investors to risk the gains currently on the table.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @Richard_WSPB

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates ALLERGAN INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate ALLERGAN INC (AGN) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins, solid stock price performance and growth in earnings per share. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

You can view the full analysis from the report here: AGN Ratings Report

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