Navellier Sees Growth in the Forest

01/31/2003 12:00 am EST

Focus:

Louis Navellier

Editor, Blue Chip Growth and Emerging Growth

Few advisors are as well-respected and as widely-followed as Louis Navellier, a noted money manager and editor of the Blue Chip Growth Letter and MPT Review. Using a proprietary system, he has a particular focus on stocks with strong earnings momentum. Here, he adds a generic drug firm to his buy list.

"I want you to buy Forest Laboratories (FRX NYSE), one of the very best generic drug companies. The stock has been one of the best performers for the past 30 years. Financially, the company is a powerhouse. For its most recent quarter, sales jumped 46% to $586 million and net income doubled to $174 million. Since profits are growing faster than sales, this means that FRX's profit margins are expanding (always a good sign). What's more, profits of $174 million off sales of $586 million translates to a net profit margin of nearly 30%. That's simply astounding.

"What's the reason behind these fantastic numbers? The answer is depression. Forest Labs is one of the dominant players in the fast-growing business of anti-depressants. And most of its success can be traced to one drug, Celexa. Over 63% of sales during the last quarter came from this one product. Celexa is the low-cost alternative to the other well-known anti-depressants (like Prozac, Paxil, and Zoloft). This is what makes the generic drug-makers so attractive. Lower-cost alternatives will always become available eventually.

"When you look behind the numbers at Forest Labs, the story is even more impressive. The company often delivers gross profit margins in excess of 77%. (Gross margins factor in solely what it costs to make the product--excluding taxes, interest, and other costs.) This means that Forest Labs can charge over $4.30 for something that costs them just $1 to make. Having a blockbuster drug is almost like having a license to print money.

"It gets better. Forest Labs doesn't have a single dime in debt, plus it's sitting on over $1 billion in the bank (or $2.78 a share). As of now, the company doesn't pay a dividend. Of course, considering its strong financial health, this may soon change. For the fiscal year ending in March 2004, Forest Labs is expected to earn $1.95 a share. That represents an increase of 20%, plus it gives the company a reasonable price/earnings ratio. I rate Forest Labs a moderate stock acceptable to almost all investors."

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