Why Endo Health Solutions Inc. Shares Slumped

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Endo Health Solutions Inc (NASDAQ: ENDP  ) sank 3% today after Cantor Fitzgerald downgraded the specialty health-care company from "hold" to "sell."

So what: Along with the downgrade, analyst Irina Rivkind lowered her price target to $43 (from $54), representing about 36% worth of downside to the previous close. While momentum traders might be attracted to Endo's share-price surge in recent months, Rivkind believes that Mr. Market is expecting far too much operational improvement at this point. 

Now what: Cantor expects Endo's Q4 to top estimates, but sees the current valuation as pretty steep. "[W]e believe that the company may be unable to make further significant SG&A cuts beyond 2014 unless it divests AMS, especially as it faces the launches of three new promotionally sensitive products (Aveed, BEMA Buprenorphine, and Zecuity)," noted Cantor. "In this way, the Endo business model differs from Valeant's, which is a vulnerability, in our view."

When you couple those concerns with the stock's red-hot run of late, waiting for a wider margin of safety seems prudent.

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