It is much easier ‘predicting the past’ than what is coming next.
By Paul Price of Market Shadows
Comedians often get ‘cheap’ but predictable laughs by using obscenities in their acts. Financial media writers feel the same way about spotlighting huge past winners that would have produced gigantic gains if only you’d bought the stocks they’re writing about now, but many years ago.
Imagine the fortune you could have made buying Ford (F) at $1 in 2008 or Apple (AAPL) at a split-adjusted $6.40 in 2003. The latest Barron’s spotlighted medical device and drug maker Allergan (AGN) while noting the shares had risen more than 1400% since the current CEO took over in 1998.
Unfortunately, we can’t buy past performance.
AGN now trades for about 23.3 times 2013 estimates and around 20.4x the consensus EPS view for 2014. Is AGN a great buy at last week’s closing quote of almost $111? To know that you have to do some homework to see the stock’s historically normal valuation levels.
Over enthusiastic buyers in the early days of 2008 paid 27.3x projected earnings for AGN while accepting a meager 0.28% yield. Profits per share grew 38.2% that year but the shares plunged from $70.09 to $29 (-58.6%) due to the overall stock market crash.
EPS growth slowed to 21% in 2009, 13.7% in 2010, 7.9% in 2011 before ticking up 12.6% in 2012. Value seeking buyers near 2008’s nadir were scooping up the same shares at less than 12x earnings.
Paying too much in January 2008 left shareholders waiting 3 years to get back to their entry price despite a near doubling of EPS from 2007 – 2011.
Last April saw a surge of interest in AGN push the shares to $116.45 or 29.4x trailing 12-month earnings. Nine months later those traders are still underwater even though 2013 will set new all-time records on fundamentals.
Smarter shoppers who waited until AGN’s June 2013 pullback were able to buy at $81.30 or just 20.5x trailing and 17.1x projected 2013 EPS. The key to making money in the market is the same as in most other arenas. Only buy when the underlying investment is selling for less than normalized pricing.
Allergan is rarely cheap. Value Line calculates an average multiple of 21.06 for the shares in the five-year period 2008 – 2012 (see highlighted statistical data on chart).
Assuming the company can deliver on the 2014 projections for $5.43 leads to a 12-month target price of $114.35. That’s just 3.2% above last week’s close. That seems pretty unexciting and would be true only if everything goes well.
Well regarded research firms Morningstar and Standard & Poors each carry ‘hold’ ratings on AGN. Both independently compute fair value as lower than the current price. S&P puts forth a one-year target almost 10% below the current quote.
I’m always amused when I see HOLDs on shares which the rating agencies themselves feel might be worth less than they are already trading for. AGN’s 0.18% current yield can’t be that attractive all by itself.
Allergan is a good company at a less than tempting price. Don’t let performance envy, wishing you’d owned it earlier, cloud your judgment about buying in at too high a valuation. Buyers at previous peak multiples might still have frown lines from the experience even if they’ve used AGN’s flagship product, Botox.
Disclosure: No position
