A Pharmaceutical Stock to Get Jazzed About
The Dow Jones index is up nearly 12 percent since the beginning of the year. The broader-based S&P 500 index is now at its highest level ever! Despite what the naysayers may say, this bull market appears to still be going strong.
Some of the stocks that have been leading the charge this year have come from the pharma sector – Gilead Sciences (up 33 percent), Pfizer (up 16 percent) and Merck (up 11 percent). However, there appear to be other pharma stocks waiting in the wings to make their big move. One stock that I’m very optimistic about over the next 6-12 months is Jazz Pharmaceuticals.
Jazz Pharmaceuticals is a specialty player within the bio-pharma space and has historically generated all their profits from the sales of their Xyrem drug. Xyrem is used to treat cataplexy and narcolepsy. Xyrem sales grew 62% last year and is expected to grow another 40 percent in 2013. The company also faces minimal competition from generic alternatives as the patents for Xyrem don’t being expiring until 2019.
While the strength and growth prospects in JAZZ’s core business is important, many investors have failed to notice the success the company is having with diversifying their revenue sources. In 2013, Xyrem will represent only 2/3 of Jazz’s total revenues (compared to 100 percent in 2011). The company is also aggressively looking for opportunities to acquire market-ready drugs that will build out its product pipeline.
Overall, Jazz management expects the company to grow their revenues between 35 – 40 percent in 2013. That’s not too shabby when compared with the slow growth environment that most companies are enduring. Even comparing that to the big dogs mentioned earlier (GILD, PFE and MRK), only Gilead Sciences is even expected to grow their revenues this year.
Not only does Jazz Pharmaceuticals look compelling from a growth perspective, but it’s even more attractive from a value standpoint. In fact, their stock trades at a very reasonable future P/E multiple of only 8x. When you compare that to Wall Street’s earnings growth expectations it looks even better. Analysts are pegging earnings to climb 21 percent this year and for the earnings growth rate to accelerate to 22 percent in 2014. That gives JAZZ a PEG ratio of only 0.3. That’s downright cheap by almost any standards.
A quick look at Jazz Pharmaceutical’s balance sheet also checks out just fine. The company now has $387M in cash and only $427M in debt on their balance sheet. I’m not concerned about the small net debt position when you consider that JAZZ generated $290 million in income from continuing operations last year.
Wall Street analysts are definitely taking notice of JAZZ. The 16 analysts covering this stock have an average price target of $73.50 for JAZZ. That represents upside potential of 35 percent from its current levels.
Plus more analysts are getting on board all the time. Last month, Cantor Fitzgerald initiated coverage of Jazz Pharmaceuticals with a Buy rating and an $86 price target. The analyst stated in his research note that “we believe that double-digit top line growth is sustainable through 2016”.
Given the company’s terrific growth prospects and attractive valuation, Jazz Pharmaceuticals looks like a strong buy at these levels and could give investors a 30 percent return over the next 12 months.