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Is Forest Laboratories, Inc. (FRX) Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Forest Laboratories, Inc. (NYSE:FRX) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

Forest Laboratories, Inc. (NYSE:FRX)

What we’re looking for
The graphs you’re about to see tell Forest Laboratories, Inc. (NYSE:FRX)’s story, and we’ll be grading the quality of that story in several ways:

Growth: Are profits, margins, and free cash flow all increasing?

Valuation: Is share price growing in line with earnings per share?

Opportunities: Is return on equity increasing while debt to equity declines?

Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at Forest Laboratories, Inc. (NYSE:FRX)’s key statistics:

FRX Total Return Price Chart

FRX Total Return Price data by YCharts.

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% (25.4%) Fail
Improving profit margin (106.3%) Fail
Free cash flow growth > Net income growth (110.5%) vs. (104.7%) Fail
Improving EPS (105.4%) Fail
Stock growth (+ 15%) < EPS growth 34.1% vs. (105.4%) Fail

Source: YCharts. *Period begins at end of Q1 2010.

FRX Return on Equity Chart

FRX Return on Equity data by YCharts.

Passing Criteria 3-Year* Change Grade
Improving return on equity (86.4%) Fail
Declining debt to equity No debt Pass

Source: YCharts. *Period begins at end of Q1 2010.

How we got here and where we’re going
Things don’t look good for Forest Laboratories, Inc. (NYSE:FRX), as it earns only one out of seven possible passing grades, and even that lone pass was granted simply because the company has no debt — a situation that may not hold up if bottom-line declines continue. However, Forest Laboratories, Inc. (NYSE:FRX)’s share price has been on an upswing despite the collapse of all our tracked financial metrics over the past three years. Will declining revenues and free cash flows continue to be ignored by the investing public, or will Forest Laboratories, Inc. (NYSE:FRX)’s fundamental weaknesses catch up to it in the end?

Like many big pharma companies, Forest suffered a big drop in revenue when a blockbuster drug’s patent expired. In Forest’s case, it was anti-depressant Lexapro, but the company has been moving forward on new drugs to replace it. Over the past several quarters, Forest has been unable to fend off stiff generic competition from Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA), which has understandably pushed down prices on Lexapro quite a bit.

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