Rating Update: Stock Rating Z-unrated (1/23/20)-Endo International plc (ENDP).

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BUSINESS

Endo International plc, a specialty pharmaceutical company, manufactures and sells generic and branded pharmaceuticals in the United States, Canada, and internationally. The company operates through three segments: U.S. Generic Pharmaceuticals, U.S. Branded Pharmaceuticals, and International Pharmaceuticals. The U.S. Generic Pharmaceuticals segment offers solid oral extended-release, solid oral immediate-release, abuse-deterrent products, liquids, semi-solids, patches, powders, ophthalmics, sprays, and sterile injectables, as well as products for the pain management, urology, central nervous system disorders, immunosuppression, oncology, women’s health, and cardiovascular disease markets. The U.S.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to fall short of the cost of capital, ENDP is expected to continue to be a major Value Eraser.

Endo Intl plc is currently unrated.

Endo Intl plc’s targeted value is not available.
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Endo Intl plc has a Power Rating of 29. (ENDP’s poor Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 29% of companies in the universe.)
Factors contributing to this poor Power Rating include: is currently in an unfavorable positi; recent price action has been slightly unfavorable; and earnings estimate behavior for ENDP has been slightly negative recently.

INVESTMENT PROFILE

ENDP’s financial strength is above average. Financial strength rating is 69.
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Relative to the S&P 500 Composite, Endo International plc has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that ENDP is extremely high risk. High historical growth is a positive for ENDP. Relative weaknesses include: low forecasted profitability, low historical profitability, high stock price volatility, high financial leverage, low expected growth, and high earnings variability. ENDP’s valuation is moderate: low dividend yield, low P/E ratio, and moderate price/book ratio. ENDP has unusually low market capitalization.

CURRENT SIGNALS

Endo Intl plc’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; and falling leverage.

Endo Intl plc’s current technical position is mixed. The stock price is in a 3.7 month up move. The stock has appreciated 89.3% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Endo International plc (NASDAQ: ENDP). Marginal positive changes in fundamentals have recently occurred: the stock’s power rating rose above 70.
The stock is currently unrated.
Endo International plc (NASDAQ: ENDP) stock closed at $6.59 on 1/23/20 after a large increase of 4.4%. NORMAL trading volume accompanied the advance. The stock has risen 20.6% during the last week but has been weak relative to the market over the last nine months.

CASH FLOW

In 2018, Endo Intl plc generated a significant increase in cash of +$147 million (+11%). Sources of cash were larger than uses. Cash generated from 2018 EBITDA totalled +$1,259 million. Non-operating uses consumed -$974 million (-77% of EBITDA). Cash taxes consumed -$32 million (-3% of EBITDA). Withdrawal of investment from the business totalled +$472 million (+37% of EBITDA). On a net basis, debt investors received -$556 million (-44% of EBITDA) while equity investors pulled out -$21 million (-2% of EBITDA).
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Endo Intl plc’s Non-operating Income, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Endo International Plc Peer Group. (Since 2016 Non-operating Income, %EBITDA has experienced a very sharp recovery.) In most years, Endo Intl plc was in the lower quartile and third quartile. Currently, Endo Intl plc is lower quartile at -77% of EBITDA (-$974 million).

Endo Intl plc’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Endo International Plc Peer Group. In most years, Endo Intl plc was in the top quartile. Currently, Endo Intl plc is slightly below median at -3% of EBITDA (-$32 million).

Endo Intl plc’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Endo International Plc Peer Group. (Since 2016 Business Re-investment, %EBITDA has experienced a very sharp decline.) In most years, Endo Intl plc was in the top quartile and lower quartile. Currently, Endo Intl plc is above median at +37% of EBITDA (+$472 million).

Endo Intl plc’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Endo International Plc Peer Group. In most years, Endo Intl plc was in the top quartile and lower quartile. Currently, Endo Intl plc is lower quartile at -44% of EBITDA (-$556 million).

Endo Intl plc’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Endo International Plc Peer Group. In most years, Endo Intl plc was in the second quartile and top quartile. Currently, Endo Intl plc is above median at -2% of EBITDA (-$21 million).

Endo Intl plc’s Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Endo International Plc Peer Group. In most years, Endo Intl plc was in the third quartile and second quartile. Currently, Endo Intl plc is at median at +12% of EBITDA (+$147 million).
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Endo Intl plc’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Endo International Plc Peer Group. (Since 2016 Cash, %Revenue has experienced very sharp improvement.) In most years, Endo Intl plc was in the third quartile and lower quartile. Currently, Endo Intl plc is slightly above median at +49%.

PROFITABILITY

ENDP’s return on equity has eroded very significantly since 2009.
The key to the story for ENDP is a very strong negative trend in pretax operating return significantly offset by a very strong positive trend in non-operating factors.
The productivity of ENDP’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend even as it experienced a very sharp recovery after the 2015 low.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend even as it recently stabilized 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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ENDP’s return on equity is upper quartile (63.1%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is substantially below median (-3.9%) reflecting asset turnover that is lower quartile (0.30X) and substantially below median pretax margin (-13.2%).
Tax “keep” rate (income tax management) is at the upper quartile (107.7%) resulting in after tax return on assets that is substantially below median.
Financial leverage (leverage) is lower quartile (-14.8X).

GROWTH RATES

Overall, Endo International plc’s growth rate has slowed very considerably in recent years.
Endo International plc’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 -2.4% per year.

Total asset growth has been 4.5% per year. (More recently it has been -15.8%.)

Annual E.P.S. growth has been 0.5% per year.

Equity growth has been -10.0% per year. (More recently it has been -71.6%.)

Endo International plc’s consensus growth rate forecast (average of Wall Street analysts) is -9.3% — substantially below the average of the historical growth measures.
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Relative to the Endo International Plc Peer Group, Endo Intl plc’s historical growth measures are erratic. E.P.S. growth (0.5%) has been substantially below median. Total asset growth (4.5%) has been slightly below median. Revenue growth (-2.4%) has been lower quartile. Equity growth (-10.0%) has been lower quartile.

Consensus growth forecast (-9.3%) is lower quartile.
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PRICE HISTORY

Over the full time period, Endo International plc’s stock price performance has been variable and significantly below market. Between March, 2009 and January, 2020, Endo International plc’s stock price fell -63%; relative to the market, this was a -91% loss. Significant price moves during the period: 1) August, 2019 – January, 2020: +178%; 2) February, 2019 – August, 2019: -78%; 3) August, 2018 – December, 2018: -57%; 4) April, 2018 – August, 2018: +199%; 5) August, 2016 – October, 2017: -69%; and 6) March, 2015 – June, 2016: -83%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -35.8% 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 December, 2019 of -35.8% is substantially below median relative to Endo International plc Peer Group.

Current 5-year total return performance of -42.1% is lower quartile relative to the S&P 500 Composite.
Through December, 2019, with lower quartile current 5-year total return of -42.1% relative to S&P 500 Composite, Endo Intl plc’s total return performance is lower quartile relative to Endo International plc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, ENDP’s overall valuation is normal. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is below median. Ratio of enterprise value/revenue is below median. Ratio of enterprise value/assets is lower quartile. Price/earnings ratio is unavailable. Price/equity ratio is unavailable.

Relative to Endo International plc Peer Group, ENDP’s overall valuation is high. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is near the lower quartile. Ratio of enterprise value/revenue is below median. Ratio of enterprise value/assets is at the lower quartile. Price/earnings ratio is unavailable. Price/equity ratio is unavailable.
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Endo Intl plc has a major value gap compared to the median valuation. For ENDP to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 2.81X to 4.97X. If ENDP’s ratio of enterprise value/revenue were to rise to 4.97X, its stock price would be lower by $28 to $35.
For ENDP to hit lower quartile valuation relative to the Endo International plc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 2.81X to 1.74X. If ENDP’s ratio of enterprise value/revenue were to fall to 1.74X, its stock price would decline by $-14 from the current level of $6.59.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to fall short of the cost of capital, ENDP is expected to continue to be a major Value Eraser.
Endo International plc’s current Price Target is not available.
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Endo International plc’s current Price Target is not available.
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PTR’s return on equity forecast is -0.0% — 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 2017 peak of 118%.

PTR’s growth forecast is 2.7% — in line with our recent forecasts. Forecasted growth suffered a dramatic, variable decline between 2010 and 2018. The current forecast is significantly below the 2011 peak of 26%.

PTR’s cost of equity forecast is 9.1% — below recent levels. Forecasted cost of equity erratic but little changed between 2010 and 2018. The current forecast is below the 2011 peak of 13.9%.
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At Endo International plc’s current price of $6.59, investors are placing -Na on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 1.0% per year, and a return on equity of 4.0% versus a cost of equity of 13.3%.
PTR’s 2020 Price Target of $-Na is based on these forecasts and reflects an estimated value of existing assets of $-Na .

About John Lafferty 61383 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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