At the London Value Investor Conference, famous value investor Michael Price pitched Hospira, Inc. (NYSE:HSP) as one of his favorite stocks. As of March, Price owned 400,000 Hospira shares. Hospira seems to be a popular stock among investment gurus including Brian Rogers, John Rogers, and Larry Robins. Let’s take a closer look to see whether or not we should invest in Hospira at its current trading price.
Business had been growing
Hospira, Inc. (NYSE:HSP), incorporated in 2003, is the developer and manufacturer of injectable drugs and infusion technologies, providing three main product lines including specialty injectable pharmaceuticals, medication management, and other pharmaceuticals such as nutritional products and contract manufacturing services. Hospira generated nearly $2.35 billion, or 60% of the total revenue, from specialty injectable pharmaceuticals, while medication management contributed nearly $1 billion in sales in 2012.
Hospira, Inc. (NYSE:HSP) had been a growing business from 2003-2010. Revenue increased from $2.6 billion in 2003 to $3.9 billion in 2010, while the net income was climbing from $260 million to $357 million in the same period. However, the operating results in 2011 and 2012 were quite sluggish. The net loss of $9 million in 2011 was due to a $400 million goodwill impairment charge of its Europe, Middle East and Africa reporting unit. In 2012, it reported $44 million in profits. The lower profit in 2012 compared to 2010 was mainly due to a 24% rise in its costs of goods sold.
Price dropped because of a plant shutdown
After the FDA shut its largest plant down, Hospira, Inc. (NYSE:HSP) dropped from the $45-$50 per-share range to only $28 per share. With around 165.5 million total outstanding shares, a drop of around $17 per share has made Hospira lose around $2.8 billion in market share. Price thought that it was when the growth guy sold to the value guy. The value guy would look at Hospira and think that it might take two years for the company to fix the plant. It might also cost the company $500 million to $1 billion. Then, when it could earn $3 per share again, the business would be worth $45 or more again.
The highest earnings valuation, but lowest by book value
At $36.60 per share, Hospira, Inc. (NYSE:HSP) is trading at 17.24 times its forward earnings and more than 2 times its book value. Compared to its peers, including Baxter International Inc. (NYSE:BAX) and Becton, Dickinson and Co. (NYSE:BDX), Hospira is still the most expensive company in terms of earnings valuation, but it’s the cheapest company in terms of book value.
Baxter International Inc. (NYSE:BAX) is trading at around $71 per share, with the total market cap of $38.5 billion. The market values Baxter at nearly 13.7 times its forward earnings and 5.5 times its book value. Baxter has a long operating history dated back in 1931, being a globally diversified company, providing its products in more than 100 countries. It has two main business segments: BioScience and Medical Products. The BioScience segment enjoyed a higher operating margin with a pre-tax income of $2.3 billion while Medical Products produced nearly $1.6 billion in pre-tax income in 2012.