Should You Buy Perrigo Stock Around $40?

We believe that Perrigo stock (NASDAQ: PRGO), a healthcare company that provides over-the-counter (OTC) self-care products, including generic drugs and consumer products, is a good buying opportunity at the present time. PRGO stock trades near $41 currently and it is, in fact, down 32% from its pre-Covid high of around $60 in February 2020 – before the coronavirus pandemic hit the world. PRGO stock has had a volatile ride the past few months. It rallied from levels of under $40 in March 2020, when broader markets made the bottom, to levels north of $58 in July 2020. Over the recent months, the stock has trended downward to levels of $41 currently. At the current price of $41, PRGO stock hasn’t gained at all since the March 2020 levels, while the broader S&P500 Index has rallied 72% over the same period. The underperformance of PRGO stock can partly be attributed to lower than estimated quarterly performance over the recent quarters.

However, the company recently announced that it will sell its generic pharmaceuticals business to Altaris Capital Partners for $1.55 billion, with $1.50 billion in cash, and $50 million based on R&D milestones. This is a positive development for the company, and after the sale of the generic drugs business, Perrigo will become a consumer products company. Furthermore, given that vaccination drives have been initiated in multiple countries, the demand for consumer products is expected to rise over the coming months, boding well for PRGO stock in the near term. In this note we focus on a comparative analysis of Perrigo stock performance during the current financial crisis with that during the 2008 recession in our interactive dashboard.

Timeline of 2020 Coronavirus Crisis:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19 2020, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/24/2020: S&P 500 recovers 72% from the lows seen on Mar 23 2020, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how PRGO stock and the broader market fared during the 2007-08 crisis

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

PRGO and S&P 500 Performance Over 2007-08 Financial Crisis

PRGO stock grew from from levels of about $22 in August 2007 (pre-crisis peak for the broader markets) to levels of $38 in September 2008 before plunging to $20 in March 2009 (as the markets bottomed out), implying PRGO stock lost 47%. It staged a stellar recovery immediately post the 2008 crisis, to levels of $40 by January 2010. In comparison, the S&P 500 Index saw a decline of 51% from its peak in September 2007 to its bottom in March 2009, followed by a sharp recovery of 48% by January 2010.

Perrigo Fundamentals Over Recent Years Have Been Lackluster

Perrigo’s revenues decreased from $5.3 billion in 2016 to $5.1 billion in 2020, partly due to certain divestitures, including its Animal Health business. The company has also seen its Net Margins contract from 14% to 11% on an adjusted basis, weighing on its EPS, which declined from $5.07 to $4.02 over the same period. Looking at 2020, Perrigo’s top-line expanded 5%, partly due to the acquisition of Dr Fresh in the oral health business.

Does Perrigo Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Perrigo total debt decreased from $5.8 billion in 2016 to $3.6 billion at the end of 2020, while its total cash increased from $622 million to $641 million over the same period. Perrigo utilized $69 million cash for its operations in 2020. The company has a sufficient liquidity cushion to weather the current crisis, and the company’s recent deal with Altaris Capital Partners will also provide a cash infusion of $1.5 billion.

Conclusion

Phases of Covid-19 Crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-October 2020: After poor Q2 results, Q3 expectations were lukewarm, but continued improvement in demand, and progress with vaccine development aided stock indices growth.
• Early 2021: Multiple countries approved the vaccines for Covid-19, further buoying market sentiment, though new variants of coronavirus resulted in uptick in active cases in several countries.

As the global economy opens up and restrictions are lifted in phases, consumer demand is expected to pick up. This could be reflected in the form of total revenues in 2021, boding well for PRGO stock in the near term. We believe that PRGO stock could rally back to its pre-Covid levels of around $60, implying over 46% upside from the current levels.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams