Allergan plc (NYSE:AGN) an Underappreciated Stock

September 12, 2016

Dr. Daniel Lang, CIO at RS Investments, says Allergan plc (NYSE:AGN) has been neglected by investors because of the Pfizer (NYSE:PFE) deal fallout. However, Dr. Lang says Allergan has the potential to grow revenue and free cash flow in the double digits.

The opportunity here is basically that I think the company has been neglected by investors or underappreciated over the past 12 months because of the Pfizer (NYSE:PFE) deal. Pfizer was expected to acquire Allergan in 2016, but because of a ruling by Treasury, the deal fell through in the second quarter. During this time, the company was continuing to create value and advance their pipeline of products, so we believe there was an information gap in terms of the fundamentals of the company and the valuation.

Allergan has been under pressure because many investors consider it to be a specialty pharma company like Valeant (NYSE:VRX). With the multiples of the specialty pharma companies coming down, Allergan stock was also under pressure. So this is a company that we believe has the potential to grow its revenue at high single digits, expand margins and also grow its free cash flow at double digits.

Despite the positive attributes, the company trades below the broader market multiple. We believe returns have the potential to improve dramatically over the next few years as their pipelines continue to deliver and they realize some of the synergies they expect to get from the Actavis/Allergan deal.

Additionally, we consider Brent Saunders, CEO, to be one of the better CEOs in the health care industry because of two things. One, we think he is a great operator of the existing business. I believe that he is going to be able to improve returns on existing assets. And second, in our view, he has been a great capital allocator, divesting relatively low-return generic businesses and acquiring high-return businesses like Allergan.