Our new Income/Value recommendation is Takeda Pharmaceutical (TAK); after nearly 20 years of lackluster performance, the Japan-based company engineered a major turnaround in all its segments, asserts Stephen Leeb, growth and income expert and editor of The Complete Investor.

The turnaround dates from 2014, a year in which despite decent gains in revenues, profits were approximately 70% lower than results at the beginning of the century.

Over the next five years, profits grew by over 85%, thanks in large part to multiple acquisitions and divestitures and a much tighter focus on the bottom line.

But far and away the biggest reason for the turnaround was the blockbuster $62 billion 2019 acquisition (one of the largest in Japanese corporate history) of Britain- and U.S.-based Shire, a major biopharmaceutical company.

Its products — most notably the world’s strongest franchise in rare diseases — has transformed Takeda from a sleepy afterthought in the biopharma world into a dynamic Top 10 worldwide biopharma company with a large array of existing products and the likelihood of more to come in the future.

Over the next five years, large accretive gains resulting from the Spire acquisition will lead to sharp gains in profit margins, with gross margins expected to rise by as much as 70%. This will combine with modest revenue growth, mostly from existing products, including Vyvanse, the leading treatment for ADD.

The company also has had success with recent trials of a drug treating a formerly intractable form of lymphoma and another drug for treating narcolepsy. In all it should translate into an annualized growth rate of at least 20% through mid-decade.

The market is taking a wait-and-see approach to the stock as evidenced by its skinny multiple in the face of several years of strong growth prior to the Shire acquisition and with well-defined prospects through mid-decade.

The estimated P/E for the year ending March 31 is less than 15, and it drops to single digits for several years out. The PEG ratio is well under 1.

Moreover, the current FCF yield is above 10%, while debt from the Shire acquisition is well under control. The current dividend translates into a yield of nearly 5%. We expect total returns to approximate 20% for the foreseeable future, making the stock a compelling choice.

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