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How Do Allergan’s Valuations Compare to Its Peers’?

Understanding Allergan's Business, Valuation, and Growth Strategy

Allergan’s valuation

On May 26, 2016, Allergan (AGN) was trading at a forward PE (price-to-earnings) multiple of ~14.7x compared to the industry average of 15.6x. Over the last year, the company’s forward PE has traded in the range of 13.2x–20.0x.

The company is trading at a higher PE than its peer AbbVie (ABBV), which is trading at 11.7x. AGN’s other competitors Pfizer (PFE) and Merck & Co. (MRK) are trading at forward PEs of 13.4x and 14.8x, respectively.

The fundamental factors affecting Allergan’s stock’s price and valuations include the performance of its growth platforms as well as the exclusivity of its blockbuster drugs.

Further, foreign exchange rates play an important role in the profitability of the company, consequently affecting its stock price and valuations.

Forward PE

From an investor’s point of view, the two best valuation multiples used for valuing companies such as Allergan are the forward PE and EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples, considering the relatively stable and visible nature of its earnings.

PE multiples represent what one share can buy for an equity investor. Based on the last five years’ multiple range, Allergan’s current valuation is high. Its PE multiple has ranged from ~9.8x to ~20.0x.

Allergan’s valuation multiple hasn’t followed the industry’s overall trend in the last five years, except for during part of 2013–2014.

Forward EV-to-EBITDA

On a capital-structure-neutral and excess-cash-adjusted basis, Allergan currently trades at ~16.1x, much higher than the industry average of ~11.9x.

Stock price performance

As per data released on May 26, 2016, Allergan’s stock value has fallen by over 24% in the last 12 months, while the SPDR S&P 500 ETF (SPY) has remained nearly flat during the same period. SPY holds 0.5% of its total assets in Allergan.

Analysts’ recommendations

Analysts estimate that Allergan’s stock has the potential to return ~28.8% over the next 12 months. Analysts’ recommendations show a 12-month targeted price of $293.56 per share for Allergan, higher than its closing price of $227.58 per share on May 25, 2016.

82% of analysts recommend “buys,” and 18% recommend “sells” on Allergan’s stock, according to Bloomberg. Changes in analysts’ estimates and recommendations are based on changing trends in the stock’s price.

Investors may want to consider ETFs such as the Health Care Select Sector SPDR ETF (XLV), which holds ~3.4% of its total assets in Allergan.

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