Follow Icahn Into Allergan Stock

  • Carl Icahn has just declared that he has invested a mint into Allergan. Investors should follow suit.
  • When the Teva deal goes through, Allergan will have a cool $20 billion extra in liquidity to look for growth options.
  • The biotech sector will recover its gains that it has lost since July 2015. Fundamentally strong Allergan will benefit handsomely.

Carl Icahn hit the headlines recently when it was reported that the billionaire investor had taken a big position in Allergan (NYSE:AGN). The biotech industry iShares NASDAQ Biotech Index (NSDQ:IBB) is down 30% since July of last year (with Allergan being down almost the same percentage) so it appears that Icahn saw value in the stock at this juncture. A company that definitely contributed to the collapse in biotech stocks was Valeant Pharmaceuticals (NYSE:VRX) which is down a whopping 90%+ in the same time frame.
AGN stock chart

Source: Allergan Stock Price Chart by

Valeant less that 12 months ago had a huge market cap only to see it collapse to a mere $8 billion. Allergan undoubtedly got caught up in this downdraft plus the breakdown of the Pfizer (NYSE:PFE) deal also put more pressure on Allergan stock. The stock definitely seemed to have formed a hard bottom last month at $201 a share and is up 13% already since then. Icahn sees more upside coming and from studying the company's fundamentals along with the strong ongoing M&A activity in this sector, it would be foolish to disagree with him in my opinion.

First of all the company's balance sheet looks very strong. The nature of this industry (especially a stock like Allergan due to its acquisition rate) means that earnings can be volatile. However over a 10 year period, its financials look excellent. If we use trailing twelve-month averages ( which means the company's first quarter results are included), earnings have gone from $1.27 per share to $11.18 a share. Revenues have gone from $2.4 billion to $16.3 billion and free cash flow has gone from $351 million to $4.6 billion. These are impressive numbers especially given the stock is trading only about $55 above its book value per share.

However, I believe that it wasn't just Allergan's financials and valuation that attracted Icahn to the stock. I also believe it was the imminent $40 billion that is going to be added to Allergan's balance sheet from the Teva Pharmaceutical (NYSE:TEVA) deal that is scheduled to go through by the end of this month. Allergan's CEO stated recently that $10 billion out of the total $40 billion (estimated to be collected from the sale) would be used for share buybacks in the months after the sale.

That should bring down the float by 41 million shares or 11% which is a sizable amount over a 3 to 6 month period. Secondly, the company has stated that it has $10 billion earmarked for debt reduction which will comprise of $8 billion right after the sale plus the additional $2 billion to be used to service bond holders who will have bonds maturing over the next 18 months. Investing in a company that has had its valuation cut by 35%+ but still is increasing earnings, is monitoring debt closely plus also is about to embark on a share repurchasing program makes total sense but it gets even better.

After share repurchases and buybacks have been paid out, the company is going to be left with $20 billion to use for growth. This is huge especially in a sector that I believe is going to lead markets higher over the next few years. Why? Well, remember that there are companies in this sector that have been destroyed over the last year. Just look at Valeant as mentioned already. Many analysts are stating that this company could go bankrupt due to its debt problems and negative earnings. If this turns out to be the case, who do you think will be coming in to pick up the assets on the cheap? It will be the companies with the strongest balance sheets. Eventually, more bankruptcies simply have to come in this sector which in the long run will just mean more consolidation. Expect Allergan to invest aggressively which has been a strategy that has served the company well in recent years.

To sum up, I believe time is running out for investors to get on board the Allergan train. There is just too much activity in M&A for biotech to enter a secular bear market. Allergan has the balance sheet, cash and product pipeline to be one of the best performers in this sector. If the biotech sector continues to trade down, the upcoming BREXIT vote could be the catalyst that will put a final bottom in this asset class. Furthermore, the combination of the $10 billion buyback plan along with the cash which is about to come out of the Teva deal should move the stock northwards at a rate of knots so timing is crucial here for investors.

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  • I do not have any business relationship with the companies mentioned in this post.
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