Taro Pharmaceutical Industries Ltd (NYSE:TARO) Stock Prospects With Trump & Sun In Charge

- March 24, 2017

Taro Pharmaceutical Industries Ltd (NYSE:TARO) is a specialist of over the counter medications and generic drugs. With $950 million in revenue last year, it is a business of significant size, one that many believe is undervalued due to an enormous cash savings and unmatched operating margins of nearly 65%. At 8x earnings minus cash, a BNL Member and equity analyst with interest in Taro Pharmaceutical Industries Ltd (NYSE:TARO) has brought the company to our attention. He has used our “request coverage” service for members to get a second opinion on TARO stock. Here’s our take:

Liam Hunter (BNL Biotech Analyst; Biotech Hunter):

Most of Taro Pharmaceutical Industries Ltd (NYSE:TARO) revenue comes from generic drugs, and most of its revenue growth in recent years has come via price increases. Look what happened to Valeant. Look what’s happening to Biogen, and other drug companies that rely on pricing for growth.

With 90% of its revenue created in the U.S., and the Trump Administration making healthcare its top priority, I would be wary of owning TARO stock right now. Long-term, I do think there is M&A appeal. Furthermore, their low cost structure is second to none.

Investors don’t like the Sun Pharmaceutical connection, and it is a big connection. Taro has managed to resist a complete merger, but Sun has 80% plus voting power. There is a lot of debate on the implications of this connection. Sun is a massive, very successful company, and it has helped Taro
build a very efficient generic business. If Taro can capitalize on some of the dermatological products going off patent in the next couple years, that could be a catalyst to drive TARO stock higher.

Nevertheless, drug pricing and implications of new policy are real concerns, both of which could affect Taro Pharmaceuticals in a big way (revenue and margins). I would wait.

Brian Nichols (BNL Portfolio)

Unlike others, I think the connection to Sun Pharmaceuticals is wonderful for Taro Pharmaceuticals long-term; I also think the financials are too strong to ignore. At the very least, Taro’s free cash flow and $1.1 billion in cash & equivalents makes it a potential buyback and dividend juggernaut. That, along with a cheap P/E multiple will attract interest over time from institutional and retail investors alike.

As for the other issue: Sun’s Dilip Shanghvi is the Chairman of Taro and one of the richest men in India. Keep in mind, Taro was a dumpster fire pre-Shanghvi, and since acquiring control, the value of Taro has surged upwards of 700%. Therefore, I’d argue that Sun Pharmaceutical’s interest has been great for TARO stock owners, igniting an emphasis in research and cost management.

Yes, I realize that as Taro’s valuation has grown the relationship with Sun and management has intensified. However, I do not believe that Sun is intentionally trying to hurt TARO stock by opposing international expansion, reportedly preventing acquisitions, and keeping its own officials as high ranking Taro executives. Just look back at how far Taro has come since Dilip Shanghvi became Chairman.

In other words, I view Sun as a good mentor, possibly preventing expansion in areas where drug pricing is not as strong. Regardless, Taro Pharmaceuticals has flourished with Sun as the majority owner, and yes, TARO stock does look very cheap.

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    Taro Pharmaceutical Industries Ltd (NYSE:TARO) Stock Prospects With Trump & Sun In Charge

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