Warner Chilcott Plc (WCRX): Should You Buy Joel Greenblatt’s Latest Pick?

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Searching for potential stock investments can be a daunting task. With so many stocks to choose from – more than 2,300 listed on the NYSE and around 2,800 on Nasdaq – how do you find good ideas?

One way, and the probably the most common way, is the use of stock screens. With information on publicly listed companies increasingly available online, it is easier now to come up with a list of companies that meet a specific criteria.


However, there are still many things that mechanical screens miss, and with so many combinations of metrics possible, the use of stock screeners can be a bit overwhelming.

You could always follow Warren Buffett’s advice and start from “A.” But if you are pressed for time, there is another excellent way to find potential ideas: looking into the portfolios of successful investors.

In this article series, I’ll be assessing the latest stock picks of Joel Greenblatt, creator of the “Magic Formula” screen and best-selling author of The Little Book That Beats the Market and You Can Be a Stock Market Genius.

His hedge fund, Gotham Capital, has delivered annualized gains of more than 50% from 1985 to 1994. He recommends looking into special situations such as mergers, spinoffs, bankruptcy and restructuring, to find the best value opportunities.

As of the latest quarter, Joel Greenblatt bought 1,366,561 shares of Warner Chilcott Plc (NASDAQ:WCRX) at an average price of $13.63, equivalent to 0.94% of his portfolio.

Business profile

Warner Chilcott Plc (NASDAQ:WCRX) is a mid-sized specialty pharmaceutical company that focuses on women’s health, dermatology, gastroenterology, and urology segments of the US and Western European markets. The company’s strategy is to focus on therapeutic areas dominated by specialists and other high-prescribing physicians.

Credit: Warner Chilcott Plc (NASDAQ:WCRX)

Price $19 P/E 12 53 17
52-wk range $11-$21 EV/EBITDA 7 11 10
Market cap $4.9 billion P/CF 6 15 10
Dividend yield 2.6% P/S 2 3 2
Revenue $2.5 billion Revenue (6.7%) 30%
Operating Margin 29% EBITDA 6.4% 37%
Net Margin 16% FCF (30.4%) 40%

Sources: morningstar.com, infinancials.com, gurufocus.com


The company has had an impressive run the past five years, growing revenues by 30% per year, EBITDA by 37% per year and free cash flow by 40% per year. It expanded operating and net margins to around 16% and 30%, respectively. It also converted an average of 30% of its sales into free cash flow.

With robust free cash flows, company shareholders have been greatly rewarded the last few years, receiving a special dividend of $8.50 per share in 2010, followed by a special dividend of $4 per share in Sept. 2012 and a recurring $0.50 annual dividend started in 2012.

Also, the company’s several products have market-leading positions: Actonel is the leading branded product in the US oral biphosphate market for the prevention and treatment of osteoporosis; while Asacol is the leading treatment for ulcerative colitis in the US.

Furthermore, the shares are trading at cheap valuations with EBIT/EV yield of 9%, EV/EBITDA of 7, and a P/CF of 6.


Several of the company’s major products face patent expiration in the next few years. Actonel, which accounted for 12% of revenue in 2012, already lost patent protection in Canada in early 2010 and Western Europe in late 2010, and it also has seen its sales drop 28% in 2012 compared to the previous year. Also, Asacol, which accounted for 19% of revenue last year, will lose patent protection in the US in July of this year. Lastly, Loestrin 24 Fe, which accounted for 9% of revenue last year, will lose patent protection in the US in July 2014.

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