Taro Pharmaceuticals, Inc. (TARO)

(6 February 2017)

TARO Business Summary

Taro Pharmaceutical Industries Ltd., a science-based pharmaceutical company, engages in the development, manufacture, and marketing of pharmaceutical products in the United States, Canada, Israel, and internationally.

TARO Fundamentals

  • Price to Earnings: 8.47
  • Earnings Per Share: $12.69
  • Market Cap: 4.4B
  • Current Ratio: 6.99
  • Return on Equity: 28.58%
  • Return on Assets: 25.08%
  • Dividend Yield: 0.00%
  • Price to Sales: 6.14
  • Price to Book: 3.17
  • Price to Free Cash Flow: 56.19

Balance Sheet ($ in Millions)

  • Total Current Assets increased $364.
  • Total Assets increased $450.
  • Total Current Liabilities decreased $65.
  • Total Liabilities Decreased $69.
  • Total Stockholder Equity increased $519.

Income Statement ($ in Millions)

  • Total Revenues increased $88.
  • Income from Operations increased $89.
  • Net Income increased $57.
  • EBITDA increased $54.

Cash Flow Statement ($ in Millions)

  • Net Cash provided by operating activities decreased $12.
  • Net Cash used in investing activities increased $193.
  • Net Cash provided by financing activities increased $4.
  • Free Cash Flow increased $17.

Highlights from Last 10 Years

  • Steady increases in all of the following: net income, revenues, cash flow, EPS, assets, and stockholders equity.
  • Over the last year, TARO was able to increase it’s assets while at the same time decreasing both current liabilities as well as total liabilities.
  • Total cash has fluctuated over the last two years, but that is expected with increases or decreases in R&D spending.
  • Free Cash flow decreased over the last year, but that was mainly due to increased spending on investment activities.

Entry Level: $106 and Below

  • Since it’s high of nearly $170 per share back in January of 2015, TARO’s share price has declined severely, down to $106 as of today.
  • However, there is significant support at this level.
  • I would buy at these levels, and dollar cost average down into the $100 range.

Exit Level: $150

  • Using discounted cash flow models, TARO’s intrinsic value is around $135, or at a 22% discount based on current stock price.
  • If the business fundamentals are still solid at that range, I would still be hesitant to hold onto it given the fact that it doesn’t pay a dividend.

Research

  • TARO has 3 Research centers: Israel, Canada, and USA.
  • TARO has become a US leader in topical prescription, with about 1 in every 8 bottles of cream/gel/lotion being made by TARO.
  • Have over 50 products, including FeverAll.
  • All in all, TARO has a strong footprint in the dermatology medication industry. Because of this, TARO presents a strong economic moat. With changes in CEO (just hired an Interim CEO), TARO looks poised to succeed in the future.
  • The main reason behind the share price drop was the courts decision on the price hiking that was going on at TARO. However, with the new Trump Administration cracking down on price hikes, situations like these might not be as common as they once were.
  • With a new CEO, a stiff slap on the wrist, and impressive competitive advantages, TARO is an undervalued growth biotechnology company that actually makes money and has extremely solid balance sheets.
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