Wrinkle in Allergan’s Forecast

Allergan (AGN) had a nice lift in after hours trading after its earnings announcement Tuesday evening, but the shares cratered after the market opened on Wednesday.

The Irvine, CA medical company exceeded analysts’ consensus estimates, prior to charges, for the first quarter. Net income more than doubled and sales of the company’s most notable product—Botox—were up by 18%. The results revealed better than expected growth internationally, as Botox sales in Europe grew at twice the pace of sales in the U.S., which speaks to a tougher consumer spending environment domestically. The concern over slowing spending dragged on the stock today, but there are also reservations regarding a February FDA decision to reexamine the safety of Botox usage.

Many of Allergan’s products (Botox and breast implants, for example) are highly dependent on disposable income. It is much harder to sell elective surgery in a slowing economy or recession. These cosmetic products make up more than 30% of AGN’s revenue and add to its extremely attractive profit margins. Concerns about continued weakness in the U.S. market for these elective procedures has dominated the price action today.

However, there is plenty of positive news affecting the stock; especially considering that despite the weak spending environment in the company’s main market, it still hit is numbers. Furthermore, products that produce the other 60%-70% of sales are more medically vital products and thus will be less affected by an economic slowdown.

AGN looks attractive at current levels, based on what the market has historically been willing to pay per share for a given level of sales and cash flow. On a price-to-sales basis, AGN shares have normally traded within the range of 4.2 to 6.12, and the current level is on 3.64. Similarly, the normal range of price-to-cash flow has been 35.88 to 54.65; the current reading of 16.56 is 54% below the low end of the normal range.

Clearly, a lot of bad news regarding the slowing U.S. economy is priced in to the stock already, while Allergan’s sales are growing quite fast abroad. The U.S. economy should recover in the months ahead, but even if it does not, international sales will keep AGN afloat. The company continues to grow and has met Wall Street quarterly estimates consistently. Ockham Research rates AGN a Buy for long term investors.

Disclosure: none