Strong Long Term Prospects With This Defensive Growth Play: Perrigo Company (PRGO)

Nutritionals sales were down 5% in the quarter, and full year guidance was reduced to 1-5% growth. The story here is all about the infant formula, which is intended to resemble some well known national brands. Wal-Mart and Costco Wholesale Corporation (NASDAQ:COST) were reported to already be positioning the product next to these brands. A lot is being pinned on this product, but I would be cautious here. People don’t take risks with infant formula, and this is a fiercely competitive segment in the US.

Rx Pharmaceuticals sales (which made up 28% of adjusted gross profits in the quarter) were flat on an adjusted basis, and the company is seeing increased competition in this sector, however operating margins expanded to 45.6% and Perrigo maintained its full year 15-19% growth forecast based on a large product pipeline.

Where Next for Perrigo?

Frankly I think there is better value out there, and if you really want to play some of the growth trends discussed above then Walgreen or CVS arguably offer better value. Perrigo has great long term drivers, but it also has near term questions that still appear challenging. The market liked the Q2 results because revenues came in ahead of expectations, but the stock now trades on 24x earnings and a forward free cash flow yield of 4%.

It’s not cheap, and the market seems to want to give it the benefit of the doubt thanks to its long term potential. Investors could wait until it grows into its evaluation but I’d rather try to pick this up cheaper.

The article Strong Long Term Prospects With This Defensive Growth Play originally appeared on Fool.com and is written by Lee Samaha.

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