The Allergan plc (AGN) stock price is jumping on Tuesday following a first-quarter earnings report that showed the drug maker hauling in more profit than Wall Street expected.
But, today’s 5% rally is actually a little overdone. Yes, AGN also announced a $10 billion share buyback program, but if you think financial engineering is going to be a long-term boost to AGN stock, you’ve got another think coming.
What Wall Street’s failing to realize about Allergan stock is that the company — best known for its Botox anti-aging and wrinkle treatment — actually missed revenue expectations by a fairly meaningful margin.
But, the revenue miss isn’t the only warning sign rearing its head today.
AGN Stock: Showing Signs of Maturity
I’m actually speechless over the reaction to Allergan’s earnings report this morning. It’s entirely nonsensical. The old adage “sales cure all” was completely ignored, as AGN missed on revenue, yet still was rewarded by a 5% pop in the Allergan stock price.
While Allergan did see revenue soar 48% year over year to $3.8 billion, this still missed the $3.95 billion consensus number by a mile. The only positive for AGN stock was a narrow earnings-per-share beat, with non-GAAP EPS rising to $3.04 per share, exceeding the $3.01 EPS estimate.
That’s not exactly a commanding beat, and combined with the more convincing revenue miss, Allergan stock should be acting very differently today. Let’s also remind ourselves that this so-called $3.04 in earnings per share is on a non-GAAP basis. Judging by the much stricter universal accounting rules (a.k.a. on GAAP basis), AGN stock actually lost 38 cents per share.
That’s a massive discrepancy, and something the Securities and Exchange Commission has recently said it will crack down on, since it feels non-GAAP reporting has largely gotten out of hand.
It’s even more important for AGN stock owners to recognize the signs that the company is sending to the markets that suggest its business is maturing.
Sure, the $10 billion share buyback is a massive influx for a company worth about $90 billion, but there are a few caveats: Firstly, the buyback is contingent on a sale of Allergan’s generic drug division to Teva Pharmaceutical Industries Ltd (ADR) (TEVA).
Not only does that throw some doubt on whether the buyback will ultimately occur or not (admittedly, not much doubt, though), it also reminds shareholders of AGN’s dubious strategy to sell its generic division in the first place.
That’s the bigger concern here: Generic drugs are of increasing importance to drug makers as cost-conscious consumers, the after-effects of the “patent cliff” and more pressure for healthcare reforms push consumers to cheaper, non-branded drugs.
The profitability of AGN’s generic division is borne out in the quarterly numbers; while AGN stock posted a GAAP loss of 38 cents per share, its generic drugs (reported as “discontinued operations”) earned 85 cents per share on a GAAP basis.
Could the $10 billion Allergan stock buyback be a positive for long-term investors? Sure. But such aggressive buybacks generally indicate a company with nowhere else to turn for growth, and while Botox continues to grow rapidly, it can only carry the company for so long.
I’d be very cautious betting on AGN stock for the long-term right now.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
