Endo Health Solutions, Inc. (NASDAQ:ENDP)

CAPS Rating: 3 out of 5

A specialty pharmaceutical company which is engaged in the research, development, sale and marketing of branded and generic prescription pharmaceuticals used primarily to treat and manage pain.

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Player Avatar FoolSolo (70.64) Submitted: 1/14/2011 5:12:52 PM : Outperform Start Price: $34.82 ENDP Score: -18.09

I opened a position in Endo today based on valuation and growth. My position includes stock and put contracts, for a net entry price of $33.41.Despite huge appreciation from low $20s in June, Endo is still a very reasonable value play. In the mid-cap drug manufacturing peer group, ENDP has a pretty low P/FCF at just 11.74, and the lowest P/E in the group at just 13. The ROE is second in the group at 21%, and their profit margin is also second in the group at a very healthy 20.62%. On the sales and earnings fronts, ENDP has consistently grown sales the past 5 years at a clip of nearly 19%, and earnings at 16% annually. Sales Q/Q are up 23% and EPS are up 10.66%. These numbers won't set the world on fire, but I suspect they deserve a better PEG than their current 1.02, and forward P/E of just 8.61.I believe the company will outperform, and here is why: the FDA approval of Fortesta a couple of weeks ago is a good sign the company is continuing to diversify and bring new products to market, which will also deliver sales and revenue growth. Their acquisition of Qualitest Pharmaceuticals for about $1.2 billion in private equity was completed on December 1st, and looks like it will help boost revenues and further enables Endo to diversify into the generics market. With the transaction complete, it puts Endo on track to hit $1.7B in 2010 revenue, and $2.2 to $2.3B in 2011. Earnings will likely come in around $3.35 to $3.40 for 2010 when they report in Feb., and $4.15 to $4.25 in 2011. In addition, Endo is investing more into their diagnostics division. CEO David Holveck announced yesterday that Endo has $500M put aside for health information technology and diagnostic tools for cancer and urology, which continues to build on the HealthTronics acquistion (urologic lab services and devices) completed last May.Looking over 2 years of quarterly reports, we can see that quarterly revenue has climbed from $335M to $444 MRQ. Cash has gone from $394M in March 2009, to $774 MRQ, although cash is down a bit from $992M in June. Receivables have ticked up a bit to $419M, whereas the normal range is $310-$350M. Inventories look steady, now at $95M. Payables have declined some of late, from $178M to $157M, and expenses are rising a bit from $313M to $375. Current liabilities also rose a bit in Sept, from $492M to $601M, while deferred taxes are $23M, which is the lowest in 2 years, and half of what they owed in June. The trend seems to be positive and steady, and cash flow seems pretty clean.Recent analyst ratings from Oppenheimer rated the stock to outperform, with a target of 40-42, while Standpoint rated them a buy, with a target of 44-48. I won't go on a limb with a price prediction, but I do believe the company will continue or slightly accelerate their growth, which should help power the stock further up the charts.

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