Company Reports

No-moat Perrigo reported mixed fourth-quarter results. Total sales were up 10 basis points year over year as the weaker-than-expected performance in the Americas was offset by the international business. After trimming our near-term assumptions, we lower our fair value estimate to $37 per share from $40.

Once a company with presence in various industries, including generic pharmaceuticals and animal health, Perrigo spent the last few years divesting noncore businesses to simplify its operation and fully focus on consumer healthcare products. Perrigo is now a pure-play consumer healthcare player and is the largest private-label over-the-counter, or OTC, consumer healthcare manufacturer in the U.S., supplying over 50% of the market on a volume basis. While we believe the retailer often wields more negotiation leverage in a fragmented OTC market due to a number of manufacturers competing for the same set of retailers, we expect Perrigo’s market share to be stable thanks to the company’s long-standing record for reliability, large-volume manufacturing capacity, and expertise in shelf space management. We expect Perrigo’s private label business to grow low single digits over the next five years from both price actions and modest volume growth.

No-moat Perrigo reported mixed third-quarter earnings that were largely in line with our expectations. Total sales, which was up 2.1% year over year, was mainly driven by infant formula acquisition (purchased in November 2022) and strong international business with offsets from stock keeping unit, or SKU, prioritization. On the backdrop of challenging dynamics in the U.S. infant formula business, management lowered sales guidance to 4%-6% from a previously stated 7%-11%. However, we also saw margins showing great momentum and improving much faster than we had initially anticipated. After slightly lowering our sales forecast for the year and upping our margin assumptions, we maintain our fair value estimate of $40 per share.

We are initiating coverage on Perrigo with a fair value estimate of $40 per share. Our forecast model has a five-year top-line compound annual growth rate of 4.4% and a moderate year-over-year margin expansion from 2022.

Once a company with presence in various industries, including generic pharmaceuticals and animal health, Perrigo spent the last few years divesting noncore businesses to simplify its operation and fully focus on consumer healthcare products. Perrigo is now a pure-play consumer healthcare player and is the largest private-label over-the-counter, or OTC, consumer healthcare manufacturer in the U.S., supplying over 50% of the market on a volume basis. While we believe the retailer often wields more negotiation leverage in a fragmented OTC market due to a number of manufacturers competing for the same set of retailers, we expect Perrigo’s market share to be stable thanks to the company’s long-standing record for reliability, large-volume manufacturing capacity, and expertise in shelf space management. We expect Perrigo’s private label business to grow low single digits over the next five years from both price actions and modest volume growth.

We are dropping coverage of Perrigo. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

We are placing Perrigo under review as we evaluate analyst stock coverage decisions. As a reminder, we provide broad coverage of close to 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Due to the earlier-than-expected close of the HRA Pharma deal, Perrigo raised its top- and bottom-line guidance estimates for 2022. As the deal is accretive to the company's operating margin, the result of closing two months prior to both management's (and our own) expectations results in a $0.35 boon to EPS for fiscal year 2022. These tailwinds were partially offset by higher-than-anticipated operating costs and disruption in the company's sales in Eastern Europe. The market reacted positively to the news; however, we are maintaining our fair value estimate of $47.50 as we do not see any of the short-term changes to be material to our long-term growth and margin assumptions. Our long-term thesis also remains steady for the no-moat company. Even with the combination of HRA's assets, we do not see any branded products in the company's portfolio that possess substantial enough brand equity to command pricing power in the market. Regarding current operations, the company's first-quarter results were within our expectations, and we do not anticipate any change to organic growth for the year.

We are picking up coverage of Perrigo, a leading private label supplier of generic over the counter (OTC) drugs and a manufacturer of branded self-care products, with a fair value estimate of $47.50 per share. Shares look nearly 20% undervalued, having fallen roughly that amount since the company announced weaker 2021 earnings guidance three months ago as a result of higher input costs and supply chain disruptions. We expect these pressures to completely alleviate by 2023 as supply chain constraints lessen, and we anticipate a pick-up in operating margin beginning in 2022. In addition, the company recently settled a longstanding income tax dispute in Ireland regarding the sale of Tysabri, reducing a large liability over the company’s head since 2015, and we see the current valuation as a great entry point on the stock.

In recent years, Perrigo has shifted its strategy to a more simplified model focused on consumer healthcare products in the U.S. and Europe. The company’s sales in the U.S. are primarily composed of private label supply operations--the manufacturing and distribution of store-branded over-the-counter (OTC) drugs to mass merchandisers and drug store chains. While the retailer often wields more negotiation leverage due to the presence of competing manufacturers (and the store’s own branding being used on the products), we expect stable market share and inflationary growth on par to slightly below the overall OTC consumer healthcare product market. By contrast, in Europe, Perrigo’s sales largely come from its own branded product portfolio. These offerings fall under the traditional OTC generics category (in cough, cold, allergy, and pain), in addition to skincare and personal hygiene. The company has over 200 branded products in its portfolio, however, none of these brands stand out as category dominating names with any degree of pricing power, in our opinion. Perrigo’s upcoming acquisition of HRA Pharma in the first half of 2022 will expand upon the company’s branded portfolio in faster-growing category niches (scar & wound care and emergency contraceptives), however, we expect the company’s brands to continue to be price takers in their respective categories.

We are dropping coverage of Perrigo. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest.

We are placing Perrigo under review as we evaluate analyst stock coverage decisions. As a reminder, we provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

No-moat Perrigo reported another quarter with the usual (significant) puts and takes complicated by the announced divestiture of its prescription business further muddied by the pandemic. Management has been active in the M&A market to better configure and manage its offerings across segments. The announced sale of its prescription business will provide the company with approximately $1.55 billion in gross proceeds that will likely aid in funding incremental acquisitions to expand its consumer self-care focus. We do not foresee a significant change in our fair value estimate of $40 per share.

No-moat Perrigo reported another quarter with significant puts and takes complicated by the usual acquisition and divestiture noise further muddied by the pandemic, but we don’t expect any major changes to our fair value estimate based on the results. Management remains active in the M&A market to manage its offerings across its three distinct segments, but these efforts will likely be thwarted as the firm is pressed for concessions by its retail customers that continue to struggle through the pandemic. As volumes stabilize, the company has started to replenish its inventory. Management plans to resume aggressive marketing campaigns that were paused to offset incremental operating costs born by the pandemic to the tune of $20 million-$25 million. Any emerging positive trends in the Americas remain overshadowed by the uphill tax battle in Ireland and challenges in the other two segments. The current $2 billion tax liability is associated with the sale of MS drug, Tysabri, that accompanied the 2013 Elan acquisition.

Perrigo’s performance has been mixed, with management changes, integration issues, the return of branded competitors to store shelves, and competitive pressure in the prescription topicals business. Before 2018, when Perrigo selected current CEO Murray Kessler, a former tobacco company CEO, it had rotated through three CEOs in two years. Murray was selected to leverage the firm's more resilient consumer health business. While we previously considered Perrigo’s store-brand market share gains from competitor manufacturing issues and consumers seeking lower-cost options during the recession as unsustainable, we believe the new management team has stabilized operations, and we expect inflationary growth on par with our overall generic market forecasts.

Perrigo reported strong second-quarter results, but discussions of emerging trends continue to muddy the outlook. We are maintaining our fair value estimate and no-moat rating, as the firm operates in a fiercely competitive commodity market. The pandemic-driven spike in consumer demand in April carried into May, and levels were likely sustained in June as clients replenished their threadbare shelves and international sales picked up at the end of the quarter. As business volumes return to normal, we anticipate operational challenges in managing the deleveraging of elevated operating expenses required to operate during the pandemic, such as employee bonuses, cleaning supplies, and safety procedures. We believe this concern caused management to defer updating guidance despite the stronger year-to-date results. Although, Perrigo has established relationships, a leading footprint and consumer expertise, we do not believe the company has significant differentiation to compete effectively in a fiercely competitive consumer commodity market.

Perrigo reported normalized EPS of $1.14, in line with the low end of management's update earlier this month, and we are maintaining our $40 fair value estimate and no-moat rating. As expected, the COVID-19 pandemic drove consumer demand for over-the-counter and prescription products, which spiked in March and remained strong through April. Perrigo is prioritizing production of high-demand items, but staffing shortages caused by the pandemic have pressured production and the company is operating at 80% capacity. Although retail demand remains strong as shelves get restocked, management is hesitant to update full-year guidance to reflect the notably stronger first quarter. Prior guidance called for net sales growth of 6% to 7% and non-GAAP EPS of $3.95 to $4.15. Despite management’s caution, we continue to believe Perrigo and generics in general are well positioned to withstand the pandemic and potential economic softness with Perrigo's ability to offer products with attractive price alternatives leveraging scale.

Perrigo announced preliminary first-quarter revenue of $1.3 billion and non-GAAP operating profit of $220 million-$225 million including the consideration of $4 million of supplemental employee benefits. The implied non-GAAP operating margin of 17% is comparable with the prior year but roughly 200 basis points ahead of consensus as tracked by Capital IQ. We estimate the preliminary non-GAAP operating profit translates into roughly $0.11 upside to first-quarter consensus estimates of $1.00 per share as tracked by CapIQ. We view the quarter as largely benefited by COVID-19 and think the stronger-than-anticipated results are not likely to be sustainable throughout the year. As a result, we maintain our $40 fair value estimate and no-moat rating. Management maintained its prior guidance for net sales growth of 6%-7% and non-GAAP earnings per share of $3.95-$4.15 as there is still much uncertainty regarding the current operating environment.

As mentioned in our Feb. 27, 2020, note, Perrigo reported weaker-than-expected operating results that were largely due to the increasing commoditization of the company’s portfolio (a key driver in our no-moat rating) and escalation of required investments for its turnaround. Before the quarter, we had expected the company to realize benefits from the generic market pricing stabilization, but operating results and turnaround were short of our expectations. Further, we anticipate the drastic reduction in retail foot traffic with the increasing number of shelter-in-place orders to adversely affect short-term volumes as Perrigo’s core business is highly reliant on manufacturing private-label products for large retailers. Although the uptake in the company’s private labels with lower prices could benefit results in a challenging economic environment, we anticipate this benefit to partially offset the large declines in volumes. Because of the slower-than-anticipated transformation as reflected in management’s revised guidance and short-term volume hit, we have adjusted our fair value estimate to $40 from $55.

Perrigo’s performance has been mixed, largely because of management changes, integration issues, the return of branded competitors like Johnson & Johnson to store shelves, and competitive pressure in the prescription topicals business. Before 2018, when Perrigo selected current CEO Murray Kessler, a former tobacco company CEO, it had rotated through three CEOs in two years. Murray was selected to leverage the firm's more resilient consumer health business. While we previously considered Perrigo’s store-brand market share gains from competitor manufacturing issues and consumers seeking lower-cost options during the recession as unsustainable, we believe the new management team has stabilized operations, and we expect inflationary growth on par with our overall generic market forecasts.