Does ACT + AGN = $500?

Yesterday Allergan (AGN) announced it had agreed to merge with Actavis (ACT). There’s a number of synergies here which will save the combined company millions (which will flow to profits) in addition to AGN’s profits being taxed at a lower rate because ACT is headquartered in Dublin instead of the US.

But the news that got me was this CNBC interview in which Acavis‘ CEO said the combined company could make $25 in profits by $2017. That’s a big number. ACT is scheduled to make around $13.50 this year, so that would mean profits almost doubling in three years.

But before this merger happened, Allergan was already getting itself in shape. The company had been fighting off a hostile bid from Valeant Pharmaceuticals (VRX) and Allergan management had announced it was laying off a bunch of workers to create better profitability (and also send the stock higher, to try to force VRX to back away). Below is a look at AGN’s stock as of last Friday.

One Year Chart

I owned AGN from June 2013 through March of this year, and sold when I thought it was fairly valued. Note in the chart below that the company put out +17% profit growth 4QtrsAgo. Allergan was a mid-teens grower for much of the last decade, and when I sold in March of this year at $128 that’s what the profit growth was. The stock also had a P/E of 24. So 17% growth for 24x earnings — AGN was high (so I thought).

Then the hostile takeover forced AGN management to trim fat — and it did. The company then started beating the street and 2014/2015 earnings estimates jumped from $5.47/$6.17 on February 28th to $6.30/$8.58 on Friday. That’s a huge jump.

This one year chart shows the P/E fo 23 in green. So AGN was expensive with a P/E of 24 then and cheap with a P/E of 23 now? Yes. That’s because profits are now growing much faster than 17%, so the stock was worth a lot more.

Fair Value

On Friday I felt AGN had a 2015 Fair Value of $257. So with Actavis paying $219, it got a deal. 

 But the big payoff might not happen until 2017. If ACT does make $25 and gets a 20 P/E then it will be a $500 stock. Wall Street obviously thinks well of the deal, as ACT is currently up $19 to $267 today. After the deal was announced yesterday morning, the stock closed up just $2 on the day. I think money managers and analysts now see what I see — this stock is a value.

Sharek’s Take

Allergan & Actavis make a great pair. I’m glad to be owning ACT in the Growth Portfolio, and may add it to the Aggressive Growth Portfolio. But before I do I want to update my figures on ACT, which I will do in the next couple of weeks. I don’t know if this is just a one-day pop or if near term profits are going up and this will cause the stock to go on a nice run. So I want to give analysts time to update their earnings projections. Either way ACT is a good stock to be hold, especially for the long-term.