RBC: Perrigo's Near-Term Risk Lessens, But Long-Term Issues Persist

Perrigo Company plc Ordinary Shares PRGO impressed investors with third-quarter earnings Thursday and issued encouraging guidance that led some of Wall Street's bears to revisit their thesis on the pharmaceutical manufacturer. 

The Analyst

RBC Capital Markets' Randall Stanicky.

The Rating

Stanicky upgraded Perrigo's stock rating from Underperform to Perform with a price target boosted from $64 to $86. (See Stanicky's track record here.)

The Thesis

Heading into Perrigo's earnings report, the bearish case was based on the belief that growth in the core U.S. consumer market was "overstated," Stanicky said in the upgrade note. While this view hasn't necessarily changed, there are no signs of erosion trends in the business, he said.

Over the near-term, Nexium will contribute some support and help avoid a "material disappointment," but for the stock to work over the medium term, the company needs growth to accelerate, Stanicky said. 

Perrigo's generic business remains a "swing factor and conundrum," and is "over-earning" at 36 percent of 2017E EBIT, the analyst said. It's unclear if the unit is up for sale, but what is clear is that at some point capital needs to be deployed to "bolster what is still a relatively limited pipeline," Stanicky said. 

Any accretive capital deployments could be seen as a "potential source of upside" given the company's prior delevering initiatives, he said. 

"We cannot justify upside against what are still potential 2018E concerns including Rx pressure, more limited CHCA growth and comping of cost cuts that have been helping support P&L," Stanicky said. "But again, our history with PRGO is that when we see P&L momentum and upward revision, the stock can trade at perceived premium valuations."

Price Action

Shares of Perrigo were trading lower by around 1 percent Friday morning.

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Photo courtesy of Perrigo.