According to IBISWorld, the fastest-growing industry in the world is the generic pharmaceutical market — over the next five years, sales for generic drugs are expected to boom 38% to $72.7 billion!
And one of the biggest players is Watson Pharmaceuticals (NYSE:WPI), which grabbed headlines this morning with its solid first-quarter earnings announcement. Let’s take a closer look and see if this is a good buying opportunity.
Company Overview: Even though the company has only been officially around since 1984, Watson has enjoyed booming growth over just a few decades. With a portfolio of over 190 pharmaceutical product families, Watson is a major force in the generic drugs market.
Based in Parsippany, New Jersey, this company employs 7,700 worldwide and has operations in over 20 countries. This company has the strongest presence in the United States, Canada as well as Latin America. The company brings in over $4.5 billion in sales annually.
Industry Breakdown: Out of the 52 companies in the Generic Drugs industry, Watson is the eighth largest in terms of market cap. Although the company does not pay a dividend, Watson stands out in terms of its bottom line growth, which is third highest in the industry.
The company’s Price/Earnings to Growth ratio is fifth highest, and its long-term growth rate is 10th. Finally, the company’s sales growth (16th) and return on equity (22nd) both fall in the top half of generic pharmaceutical companies.
Watson’s top competitors are Mylan (NYSE:MYL), Switzerland’s Novartis (NYSE:NVS) and Israel’s Teva Pharmaceuticals (NASDAQ:TEVA). Of these four companies, Watson has the highest sales growth, but the lowest operating margin growth.
Earnings Buzz: Before the opening bell on Monday, Watson announced strong top-and bottom-line growth for the first quarter. Compared with the same quarter last year, the company’s net income jumped 21% to $54.8 million. Adjusted net income weighed in at $1.64 per share, which topped the $1.60 consensus estimate by 3%. Over the same period, net sales soared 74% to $1.52 billion; this also topped the $1.48 billion consensus estimate by 3%.
In particular, Watson Pharma’s global generic business did well, reporting an 86% year-over-year increase in net sales. And it’s no wonder because this business launched more than 60 new products and filed 28 applications worldwide. The company also boosted its sales and earnings guidance for the rest of 2012.
Current Ratings: Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. This stock has stayed firmly in buy territory over the past 12 months. To start, this company’s fundamentals are strong: the only areas of improvement left for Watson Pharma is its return on equity and its track record of beating earnings surprises.
Otherwise, the company is doing great in terms of sales and earnings growth. In addition, buying pressure for this stock is top-notch.
All-in-all, this is an A-rated stock.
Recommendation: Strong Buy
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