Watson Pharmaceuticals Earnings Preview

Watson Pharmaceuticals

WPI

is scheduled to report its second-quarter 2011 results Tuesday, July 26, before the markets open. Strong first-quarter results pushed the share price to a new all-time high; can second-quarter results do the same? Analysts are looking for the drug maker to report per-share earnings of $1.00, which is up from $0.83 in the same period of last year. It is also up from the consensus EPS estimate of $0.96 some 60 days ago. The analysts' forecast also calls for the company to post revenues of $992.1 million, an increase of 13.3% from a year ago. Note that Watson Pharmaceuticals has not fallen short of quarterly EPS estimates since 2006; per-share earnings topped consensus expectations by about 3% in the first quarter. Also, analysts so far are looking for sequential and year-over-year growth of both earnings and revenue in the current quarter.

The Company

New Jersey-based Watson Pharmaceuticals develops, manufactures, markets and distributes generic and brand pharmaceutical products focused on urology and women's health. It operates in three segments: Global Generics, Global Brands, and Distribution, and its products are distributed through national retail drug and food store chains, hospitals, clinics, mail order, government agencies and managed health care providers. The company was founded in 1983. During the three months that ended in June, the company relocated its corporate headquarters from Corona, California, to Parsippany, New Jersey. It also acquired Specifar Pharmaceuticals, a Greek company, and launched generic versions of AMRIX and Concerta.

Performance

Watson Pharmaceuticals has a long-term earnings per share growth forecast of 12.5%. Its P/E ratio is less than the industry average, and it has a PEG ratio of 1.1. Net cash flow from operations doubled in the most recent reporting period from the previous one. The consensus recommendation has been to buy WPI for more than 90 days; 10 of 21 analysts now rate the stock a Buy or Strong Buy. The share price has risen steadily over the past few years and is currently trading near an all-time high of $70.77. The stock is more than 36% higher than at the beginning of the year. The price remains above the 50-day and 200-day moving averages. Year to date, the stock has outperformed the generic drugs industry average, as well as the competitors such as Novartis

NVS

and Teva Pharmaceutical

TEVA

Action Items:Bullish:

Traders interested in exchange traded funds invested in Watson Pharmaceuticals might want to consider the following trades:

SPDR S&P 500 Trust SPY: up 21.4% in the past year
Health Care Select Sector SPDR Fund XLV: up 24.5% in the past year
Pharmaceutical HOLDRS Trust PPH: up 20.0% in the past year
Vanguard Mid-Cap Growth Index VOT: up 36.3% in the past year

Bearish:

Traders looking for other high-performing drug maker stocks might want to consider these positions:

Pharmasset VRUS: up 214.4% year to date
Cubist Pharmaceuticals CBST: up 66.9% year to date
Alexion Pharmaceuticals ALXN: up 46.4% year to date
Shire SHPGY: up 40.5% year to date

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