Perhaps most importantly, Mr. Market has historically valued this company at a discount to its growth rate by applying a normal P/E ratio of 17.5 (the dark blue line). Consequently, it is arguable that the current P/E of 12.2 reflects the uncertainties of the Health Care Reform Act discussed above.
In spite of the fact that Mr. Market has shown a penchant for discounting the intrinsic value of this quality biopharmaceutical, historical performance has been spectacular. A $10,000 investment on December 31, 2006 today would be worth $311,824.47, representing an annualized rate of return of 68.8%. Add in over $4,000 in dividends, and the total annualized return, including dividends, becomes 69.2%. Consequently, Questcor Pharmaceuticals Inc (NASDAQ:QCOR) has lavishly rewarded shareholders with both above-average income and significant capital appreciation. If this doesn’t prove that it is a market of stocks rather than a stock market, then I don’t see how anything can.
The consensus of 7 analysts reporting to Standard & Poor’s Capital IQ expect continued above average earnings growth of 20.5% per annum for Questcor Pharmaceuticals Inc (NASDAQ:QCOR). Accordingly, although it would be naive to expect to duplicate Questcor’s historical performance, there appears to be significant future performance left in this interesting small cap biopharmaceutical. Further due diligence is suggested, but certainly appears worthy of the effort.
Finally, courtesy of FUN Graphs, there are two additional fundamental metrics that appear to support a closer look at Questcor. Free cash flow (fcfl) has advanced from 10 million dollars in 2007 to over 194 million dollars by year-end fiscal 2012. This rendition of free cash flow is after dividends have been paid, indicating that not only is the current dividend safe, but there appears to be ample room for it to continue to grow.
In addition to the initiation of a generous dividend, Questcor has also been rewarding shareholders by buying back their shares. Share count has fallen from 68 million shares in 2006 to 58 million shares by fiscal year-end 2012. Reducing share count supports continued earnings growth going forward.
Conservative Health Care Sector Portfolio
My screen produced 17 conservative Health Care dividend paying stocks that I felt were worthy of further scrutiny based on current valuation. The following portfolio review lists them in alphabetical order.
Merck & Co., Inc. (NYSE:MRK)
As I discussed in the opening paragraph of this article, and before I feature a few of my favorite conservative dividend paying Health Care stocks, I felt it would be useful to review a sampling of the big pharma company, Merck & Co., Inc. (NYSE:MRK). As the Earnings and Price Correlated FAST Graph on Merck & Co reveals, from 1993 to the end of 2001, Merck generated very consistent and strong historical earnings growth (note the steepness of the slope of the orange line). It is also interesting to note that this was during the irrational exuberant period that was characterized by excessive overvaluation.
However, since the recession of 2001, which I believe only coincidently correlates, Merck & Co., Inc. (NYSE:MRK)’s earnings record became very inconsistent and cyclical. This same attributes of flat and inconsistent earnings growth over the last 15 years can also be seen with most of the other big pharma companies such as Pfizer, Astra Zeneca, Bristol Meyers, etc. Perhaps they became too big and their pipelines too meager to support continuing above-average growth. This radical shift and change in the operating performance of big pharma is an extremely important fact that investors must consider and factor into their thinking. I believe that many investors continue to see big pharma as the consistent growth stocks they once were. This is a mistake, as evidenced by their historical operating results.
