This commentary was originally sent to Action Alerts PLUS subscribers at 10:32 on May 31.
This morning, Carl Icahn released a statement indicating he had recently acquired a "large position in Allergan (AGN) and are very supportive of CEO Brent Saunders". We have tremendous respect for Carl Icahn as an investor, and while we have never recommended blindly piggy-backing on his investments, we do view the news as a modestly incremental positive, as it reinforces confidence not only in the company but in the leadership of Mr. Saunders.
Although Icahn has a history of taking an active approach towards the companies he invests in, the statement he released is vocally supportive of management, noting "we have every confidence in Brent's ability to enhance value for all Allergan shareholders". We largely look past the Icahn announcement and continue to reiterate our constructive view long-term, and are focused on our expectation for value creation upon completion of AGN's generics sale to Teva (TEVA).
We do acknowledge that Icahn is a legendary investor and has a proven track record of investing in shares of undervalued companies. He is worth over $20 billion for a reason (30% annualized returns since 1968), with his success driven by his willingness to make concentrated bets on companies (many of which are controversial), exercising patience (his average holding period of two years), and from time to time taking a more active role.
Even though we disagreed with his most recent decision to exit Apple (AAPL), announced one month ago, we also recognize he had owned shares for nearly three years and cannot blame someone for ringing the register after a $1.8 billion, or 50%, gain.
When it comes to AGN, we view shares as undervalued, especially in context of the company's core annualized sales/earnings growth trajectory of 10% and 15%, respectively, with upside driven by debt/interest payment reductions, share buybacks and accretive acquisitions post-divestiture.
Ultimately, we expect an upward revision in AGN's valuation multiple following the completion of the deal as 1) the business model further distances itself from specialty pharma and speculative pharma peers; 2) uncertainty overhang is lifted; and 3) management unlocks capital deployment opportunities.
We reiterate our $270 conservative price target, but again, see upside as we are given more clarity into the closing of the Teva deal.