Michael Price Is Bullish on This Drug Manufacturer

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

Editor's Note:The initial article stated Hospira closed their largest plant due to FDA actions. This is incorrect; Hospira shut their plant for scheduled maintenance. This version has been corrected and Motley Fool apologizes for the error.

At the London Value Investor Conference, famous value investor Michael Price pitched Hospira (NYSE: HSP) as one of his favorite stocks. As of March, Price owned 400,000 Hospira shares. Hospira seems to be a popular stock among investment gurus including Brian Rogers, John Rogers, and Larry Robins. Let’s take a closer look to see whether or not we should invest in Hospira at its current trading price.

Business had been growing

Hospira, incorporated in 2003, is the developer and manufacturer of injectable drugs and infusion technologies, providing three main product lines including specialty injectable pharmaceuticals, medication management, and other pharmaceuticals such as nutritional products and contract manufacturing services. Hospira generated nearly $2.35 billion, or 60% of the total revenue, from specialty injectable pharmaceuticals, while medication management contributed nearly $1 billion in sales in 2012.

Hospira had been a growing business from 2003-2010. Revenue increased from $2.6 billion in 2003 to $3.9 billion in 2010, while the net income was climbing from $260 million to $357 million in the same period. However, the operating results in 2011 and 2012 were quite sluggish. The net loss of $9 million in 2011 was due to a $400 million goodwill impairment charge of its Europe, Middle East and Africa reporting unit. In 2012, it reported $44 million in profits. The lower profit in 2012 compared to 2010 was mainly due to a 24% rise in its costs of goods sold.

Price dropped because of a plant shutdown

After temporarily shutting down its largest plant, Hospira dropped from the $45-$50 per-share range to only $28 per share. With around 165.5 million total outstanding shares, a drop of around $17 per share has made Hospira lose around $2.8 billion in market share. Price thought that it was when the growth guy sold to the value guy. The value guy would look at Hospira and think that it might take two years for the company to fix the plant. It might also cost the company $500 million to $1 billion. Then, when it could earn $3 per share again, the business would be worth $45 or more again.

The highest earnings valuation, but lowest by book value

At $36.60 per share, Hospira is trading at 17.24 times its forward earnings and more than 2 times its book value. Compared to its peers, including Baxter International (NYSE: BAX) and Becton, Dickinson and Company (NYSE: BDX), Hospira is still the most expensive company in terms of earnings valuation, but it's the cheapest company in terms of book value.

Baxter is trading at around $71 per share, with the total market cap of $38.5 billion. The market values Baxter at nearly 13.7 times its forward earnings and 5.5 times its book value. Baxter has a long operating history dated back in 1931, being a globally diversified company, providing its products in more than 100 countries. It has two main business segments: BioScience and Medical Products. The BioScience segment enjoyed a higher operating margin with a pre-tax income of $2.3 billion while Medical Products produced nearly $1.6 billion in pre-tax income in 2012.

Looking forward, Baxter expects that its sales growth will be around 10%, excluding currency exchange impact. The full year 2013 EPS was estimated to stay in the range of $4.60 to $4.70 per share. Income investors might like Baxter with its increasing dividends over the past 10 years. Its dividend has risen from $0.58 per share in 2003 to $1.57 per share in 2012. At the current trading price, Baxter offers investors a decent dividend yield at 2.8%.

Becton, Dickinson and Company is trading at around $100 per share, with the total market cap of $19.44 billion. The market values the company at 15.9 times its forward earnings and 4.2 times its book value. At the current price, the dividend yield stays at 2%. Investors might be bullish on the company due to the fact that its subsidiary, Becton Dickinson Rx, recently received FDA approval for its second drug in the BD Simplist line of ready-to-administer prefilled generic injectables. It would help clinicians simplify the traditional vial and syringe injection sequence, minimizing the potential medication error. For the full year, the company expected to have 3.5%-4% in revenue. The EPS might experience decent growth of 6.5% to 7% to the range of $5.72 - $5.75 per share.

My Foolish take

Hospira could be considered an opportunistic play on the turnaround after its recent missteps with its lowest book value ratio. Michael Price believed that its EPS could recover to $3 per share. Now selling at 15 times earnings, Hospira could reach $45 per share in the near future. 

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Becton Dickinson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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