Pfizer Inc. (PFE), Actavis Inc (ACT): Which Generic Drugmaker Is Your Best Buy Today?

Taro Pharmaceutical Industries Ltd. (NYSE:TARO) is a small generic Israeli-pharmaceutical company that develops and markets over-the-counter and prescription pharmaceuticals with a primary focus on pediatric creams and ointments. The company appears to be significantly undervalued at less than ten times trailing earnings with stellar earnings and revenue growth. Taro Pharmaceutical Industries Ltd. (NYSE:TARO)’s niche also allows the company to command superior gross margins due to the higher complexity of manufacturing topical products.  The company is an impressive growth stock in a hot industry trading for a bargin price.

Investors must also be aware that Sun Pharma has attempted to complete an acquisition of Taro after purchasing a 67% stake several years ago. Shareholders rejected a $39.50/share offer last year that grossly undervalued the company.  Even at $58/share the market values Taro at  5.74 times EV/EBITDA. Considering recent comparable acquisitions, Taro remains underpriced by 53% relative to the minimum acquisition price, and nearly threefold relative to the median.

Which stock has the best prescription for profits?

Given the recent pullback and the strong psychological anchor of the already rejected offer, it seems unlikely that Taro will fall much further. The present price appears to be an attractive entry point, and a buyer today can count on improving business fundamentals or immediate price appreciation if Sun increases its offer.

Taro hits the trifecta with very attractive fundamentals, a cheap share price relative to its growth, and a catalyst for higher prices on the horizon. Thus, it seems likely that an investment in the company will provide excellent returns moving forward.

Brendan O’Boyle has positions in MYL and TARO. The Motley Fool has no position in any of the stocks mentioned.

The article Which Generic Drugmaker Is Your Best Buy Today? originally appeared on Fool.com and is written by Brendan O’Boyle.

Brendan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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