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Focus Picks: Perrigo Company (PRGO) And ITT Corporation (ITT)

By Todd Campbell
Date: Monday, January 13, 2014 12:22 PM EST

In the 3-month period ending February, PRGO has posted gains in 9 of the past 10 years, generating a 12.97% average return and a 10.42% median return. PRGO's standard deviation is 18.47% in the period and its correlation to the SPY is 0.51.
 



Store brands account for 35% of the OTC market, providing support for Perrigo given its the largest maker of private label OTC products.  57% of Perrigo's sales come from consumer healthcare products including cough/cold (~14%) and analgesics (~14%), 16% of its sales come from nutritional products like infant formula, and 20% from drugs.  The remainder of its revenue comes from APIs and diagnostics.  Perrigo's sales have grown a compounded 16% annually during four years ending 2012. Operating income has grown a compounded 30% over the same period.  Over the past seven years, sales have grown 9% organically per year.  Acquisitions have remained an important revenue driver, contributing a compounded 44% growth a year.  Rising demand for store branded products have lifted consumer healthcare sales more than 15% each year since 2008.  Perrigo launched 60 products in FY13 worth $130 million in annual sales and plans to launch 75 products in FY14 worth $190 million in annual sales.  Additional opportunity exists given Perrigo believes there's $10 billion in branded sales that could move to OTC over the next five years.  An even greater sales opportunity would occur if product categories such as statins move to OTC too.  Perrigo is exploring opportunities to enter adjacent consumer product categories, including the dry eye and wound treatment -- both of which are markets worth more than $2 billion.  Perrigo has also bolstered its presence in retail store diabetes care, offering products targeting more than 65% of the $3 billion market.  The nutritionals business has grown from $171 million in 2008 to more than $500 million in 2012. Future growth stems from increasing private label share of powdered infant formula, which has grown from 11% share to 12% share over the past year.  Perrigo's drug business has grown from $160 million to $617 million from 2008 through 2012 as operating margin this segment has expanded from 21.8% in 2009 to 44% in 2012 and 50.6% in FYQ1.  As of the middle of August, Perrigo had 34 ANDAs pending worth $5 billion in branded sales.  The API business, while small, offers solid operating margin, which grew from 38% last year to 53% in FYQ1.  API sales have grown from $144 million in 2008 to $166 million in 2012.  Perrigo's acquisition of Elan strengthens its international reach while reducing its tax rate from the mid 30s to the high teens.  Elan brings along royalty revenue from the blockbuster MS drug Tysabri, which was developed by Elan with Biogen.  Sales of Tysabri have grown a compounded 19% over the past four years.  Combined with operational overlap, the merger is expected to save $150 million a year. Full year fiscal 2013 operating margin grew 110 bps, fueling 12% growth in full year EPS.  FYQ1 sales were up 21% to $933 million and EPS grew 20% to $1.52.  Operating margin in the first quarter improved 120 bps to 24.2%.  importantly, organic growth was 13% in the quarter.  In fiscal 2014, Perrigo is guiding for 12-16% revenue growth, 23%-25% operating margin and 13-18% EPS growth. 

 

Symbol Price Volume Avg Vol P/E Mkt Cap PEG Ratio
PRGO 161.7 1,278,862 1,318,860 34.11 15.2481B 1.63
Price/Book % 52-Wk High % 200-Day MA Short Ratio EPS Next Yr EPS Curr Yr %  50-Day MA
6.07 -0.04% 19.65% 17.4 8.01 6.62 4.74%

 

 

Q3 Earnings Transcript


ITT Corporation (ITT)
 
In the 3-month period ending February, ITT posted gains in 8 of the past 10 years, generating a 5.38% average return and a 7.68% median return. ITT's standard deviation is 13.98% in the period and its correlation to the SPY is 0.94.

 



A recovery in European auto demand offers upside opportunity to the company's motion control business, which makes brake pads and shocks.  Industrial demand benefits from ongoing pump deman tied to oil and gas exploration.  Structural shifts have returned the company's interconnect solutions segment back to profitability.  Long term aerospace trends support control technologies revenue.  35% of sales come from fast growing emerging markets and roughly a third of sales come from higher margin aftermarket sales.  39% of its total sales are to U.S. customers.  ITT's biggest segment is industrial process, which sells pumps and valves, and accounts for 43% of revenue.  Motion control, which markets shocks and brakes, represents 28% of revenue.  Interconnect products and control technology account for 17% and 12%, respectively.  ITT is heavily weighted toward the transportation industry, which makes up 44% of revenue.  Industrial pumps and energy products represent 20% and 16% of sales.   45% of revenue comes from OEMs.  Overall, revenue grew 16% in Q3 as organic sales climbed 9%.  Operating margin grew 60 bps, resulting in EPS of $0.54, up 23% YoY.  Weakness in mining is being more than offset by strength in auto and oil & gas pumps.  Industrial process sales were up 19% in the quarter as oil and gas shipments grew 50%.  Sales of pumps to the chemical industry climbed 12%.  However, operating income slipped 4% YoY on investments and product mix. Industrial process orders were up 33% and the segment's backlog grew 24% to $721 million. Motion tech sales improved 17% to $177 as segment operating income grew 33%.  18% growth in Global auto brake pad sales were up 18%, led by 21% growth in Western Europe and 31% growth in China. That more than offset lower demand for rail shock absorbers.  Segment operating margin expanded 190 bps.  Interconnect sales increased 14% to $104 million as 36% growth in aerospace offset European weakness.  Control tech sales were $70 million, up 3%, thanks to 14% growth in aerospace components.  That strength was weighed down by weakness in defense and tough comparisons.  In motion control, market share wins in Europe and China are driving the business, with China's brake pad business up 50% year-to-date.  Earnings benefit from operational improvement, resulting in $33 million in costs savings in Q3 and an estimated $110 million in total savings in 2013.   Pay close attention to European industrial production as ITT delivered 26% total and 15% organic revenue growth in Western Europe.   Overall, orders were up 23% and ITT is guiding for 11-12% revenue growth and 18% EPS growth to $1.97-$2 in FY13.  Over time, the company is modeling for long term organic growth of 5%-7% a year and EPS growth of 10%-15% per year.

 

Symbol Price Volume Avg Vol P/E Mkt Cap PEG Ratio
ITT 44.49 890,500 699,167 8.09 4.0352B 1.6
Price/Book % 52-Wk High % 200-Day MA Short Ratio EPS Next Yr EPS Curr Yr %  50-Day MA
3.55 -0.02% 21.29% 1.2 2.33 1.99 5.52%

 

Corporate Presentation
Company's Q3 EPS transcript

None.