Rating Update: Stock Rating D-Negative (9/26/19)-Akorn Inc (AKRX).

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BUSINESS

Akorn, Inc., a specialty generic pharmaceutical company, develops, manufactures, and markets generic and branded prescription pharmaceuticals, over-the-counter (OTC) consumer health products, and animal health pharmaceuticals in the United States and internationally. The company operates in two segments, Prescription Pharmaceuticals and Consumer Health. The Prescription Pharmaceuticals segment offers generic and branded prescription pharmaceuticals in various dosage forms, including sterile ophthalmics, injectables, and inhalants; and non-sterile oral liquids, topicals, nasal sprays, and otics.
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INVESTMENT RATING

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With future capital returns forecasted to exceed the cost of capital, AKRX is expected to continue to be a modest Value Builder.

Akorn has a current Value Trend Rating of D (Negative).
The Value Trend Rating reflects inconsistent signals from PTR’s two proprietary measures of a stock’s attractiveness. Akorn has a neutral Appreciation Score of 50 but a poor Power Rating of 19, resulting in the Negative Value Trend Rating.

Akorn’s stock is selling well below targeted value. The current stock price of $3.82 compares to targeted value 12 months forward of $5.
This neutral appreciation potential results in an appreciation score of 50 (50% of the universe has greater appreciation potential.)
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Akorn has a Power Rating of 19. (This poor Power Rating indicates that Akorn only has a better chance of achieving attractive investment performance over the near to intermediate term than 19% of companies in the universe.)
Factors contributing to this poor Power Rating include: the trend in Akorn’s earnings estimates has been unfavorable in recent months; is currently in an unfavorable positi; and recent price action has been slightly unfavorable.

INVESTMENT PROFILE

Akorn’s financial strength is high. Financial strength rating is 72.
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Relative to the S&P 500 Composite, Akorn Inc has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that AKRX is higher risk. Relative weaknesses include: low historical profitability, high stock price volatility, and high earnings variability. Akorn’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. AKRX has unusually low market capitalization.

CURRENT SIGNALS

Akorn’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.

Akorn’s current technical position is moderately positive. The stock price is in a 0.5 month up move. The stock has appreciated 54.7% from its prior low. The stock price is above its 200 day moving average which is in an uptrend. The stock has just risen above its 200 day moving average.

ALERTS

Akorn Inc (NASDAQ: AKRX) has recently enjoyed significant positive changes in investment behavior: the stock’s recent price rise disrupted its longer term downtrend.
Marginal negative changes in fundamentals have recently occurred for Akorn Inc (NASDAQ: AKRX): significant quarterly earnings deceleration occurred.
The stock is currently rated D.
Akorn Inc (NASDAQ: AKRX) stock closed at $0.16 on 9/26/19 after a major increase of 13.3%. However, this advance was accompanied by exceptionally low trading volume at 42% of normal. The stock has risen 1.6% during the last week but has been weak relative to the market over the last nine months.

CASH FLOW

In 2018, Akorn experienced a very significant reduction in cash of -$142.32 million (-39%). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$26.64 million. Non-operating uses consumed -$324.60 million (-1218% of EBITDA). Cash taxes consumed -$6.57 million (-25% of EBITDA). Withdrawal of investment from the business totalled +$199.87 million (+750% of EBITDA). On a net basis, debt investors removed -$52.20 million (-196% of EBITDA) while equity investors contributed +$14.53 million (+55% of EBITDA).
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Akorn’s Non-operating Income, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Akorn Inc Peer Group. (Since 2015 Non-operating Income, %EBITDA has accelerated very sharply.) In most years, Akorn was in the top quartile and second quartile. Currently, Akorn is lower quartile at -1218% of EBITDA (-$324.60 million).

Akorn’s Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Akorn Inc Peer Group. In most years, Akorn was in the top quartile and lower quartile. Currently, Akorn is lower quartile at -25% of EBITDA (-$6.57 million).

Akorn’s Business Re-investment, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Akorn Inc Peer Group. (Since 2016 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Akorn was in the second quartile and top quartile. Currently, Akorn is upper quartile at +750% of EBITDA (+$199.87 million).

Akorn’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Akorn Inc Peer Group. In most years, Akorn was in the third quartile and top quartile. Currently, Akorn is lower quartile at -196% of EBITDA (-$52.20 million).

Akorn’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Akorn Inc Peer Group. (Since 2016 Equity Investors, %EBITDA has experienced a very sharp recovery.) In most years, Akorn was in the third quartile and second quartile. Currently, Akorn is substantially above median at +55% of EBITDA (+$14.53 million).

Akorn’s Change in Cash, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Akorn Inc Peer Group. In most years, Akorn was in the top quartile and second quartile. Currently, Akorn is lower quartile at -534% of EBITDA (-$142.32 million).
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Akorn’s Cash, %Revenue has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Akorn Inc Peer Group. In most years, Akorn was in the third quartile and lower quartile. Currently, Akorn is below median at +33%.

PROFITABILITY

Akorn’s return on equity reached a new post-2010 low in 2019.
This was due to very strong negative trend in pretax operating return offset by very strong positive trend in non-operating factors.
The productivity of Akorn’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend but it experienced a sharp recovery after the 2017 low.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend that accelerated very sharply from the 2016 level.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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Akorn’s return on equity is lower quartile (-183.%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is substantially below median (-34.6%) reflecting asset turnover that is above median (0.47X) and substantially below median pretax margin (-73.7%).
Tax “keep” rate (income tax management) is at median (98.0%) resulting in after tax return on assets that is substantially below median.
Financial leverage (leverage) is upper quartile (5.42X).

GROWTH RATES

Overall, Akorn’s growth rate has slowed very considerably in recent years.
Akorn’s historical income statement growth and balance sheet growth have diverged. Revenue growth has fallen short of asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 24.8% per year. (More recently it has been -16.4%.)

Total asset growth has been 33.3% per year. (More recently it has been -9.5%.)

Annual E.P.S. growth has been 31.6% per year.

Equity growth has been 20.4% per year. (More recently it has been -33.5%.)
No consensus growth rate forecast is available for Akorn.
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Relative to the Akorn Inc Peer Group, Akorn’s historical growth measures are generally top quartile. E.P.S. growth (31.6%) has been upper quartile. Total asset growth (33.3%) has been at the upper quartile. Revenue growth (24.8%) has been at the upper quartile. Equity growth (20.4%) has been at the upper quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Akorn’s stock price performance has been volatile and below market. Between November, 2008 and September, 2019, Akorn’s stock price rose +133%; relative to the market, this was a -30% loss. Significant price moves during the period: 1) July, 2018 – April, 2019: -85%; 2) July, 2017 – May, 2018: -58%; 3) February, 2015 – October, 2015: -50%; 4) October, 2012 – October, 2014: +271%; 5) January, 2011 – June, 2012: +215%; and 6) April, 2009 – December, 2010: +623%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -79.9% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through July, 2019 of -79.9% is lower quartile relative to Akorn Inc Peer Group.

Current 5-year total return performance of -35.7% is lower quartile relative to the S&P 500 Composite.
Through July, 2019, with lower quartile current 5-year total return of -35.7% relative to S&P 500 Composite, Akorn’s total return performance is lower quartile relative to Akorn Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, AKRX’s overall valuation is normal. The highest factor, the price/equity ratio, is at the lower quartile. Ratio of enterprise value/assets is lower quartile. Ratio of enterprise value/revenue is near the lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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Akorn has no value gap compared to the median. For AKRX to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.74X to 1.87X. If AKRX’s ratio of enterprise value/revenue were to rise to 1.87X, its stock price would be higher by $1 to $5.
For AKRX to achieve upper quartile valuation relative to the Akorn Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.74X to 3.77X. If AKRX’s ratio of enterprise value/revenue were to rise to 3.77X, its stock price would increase by $11 from the current level of $3.82.

VALUE TARGETS

With future capital returns forecasted to exceed the cost of capital, AKRX is expected to continue to be a modest Value Builder.
Akorn’s current Price Target of $5 represents a +30% change from the current price of $3.82.
This neutral appreciation potential results in an appreciation score of 50 (50% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 50, the low Power Rating of 19 results in an Value Trend Rating of D.
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Akorn’s current Price Target is $5 (-46% from the 2018 Target of $9 but +30% from the 09/26/19 price of $3.82). This dramatic fall in the Target is the result of a -1% decrease in the equity base and a -46% decrease in the price/equity multiple. The forecasted decline in return on equity has a very large negative impact on the price/equity multiple and the forecasted decline in growth has a very large negative impact as well. Partially offsetting these Drivers, the forecasted decline in cost of equity has a very large positive impact.
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PTR’s return on equity forecast is 8.0% — slightly below our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly below the 2014 peak of 38%.

PTR’s growth forecast is 4.0% — significantly below our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is significantly below the 2015 peak of 30%.

PTR’s cost of equity forecast is 6.7% — in line with recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2010 and 2018. The current forecast is well below the 2014 peak of 14.0%.
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At Akorn’s current price of $3.82, investors are placing a negative value of $-0 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 14.0% per year, and a return on equity of 11.1% versus a cost of equity of 7.7%.
PTR’s 2020 Price Target of $5 is based on these forecasts and reflects an estimated value of existing assets of $4 and a value of future investments of $0.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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