Why Tapering Is Great News for Allergan Inc.

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

The U.S. economy is in better shape than it was a few months back and in even better shape than it was at the start of 2013. Not only is this good news for families across the U.S., but it's also awesome news for growth stocks like Allergan (NYSE: AGN.DL  ) .

That's because growth stocks tend to perform well during the more prosperous parts of the business cycle, when consumer confidence is improving and households across America are spending more and more. In addition, the risk premiums attached by the market to growth stocks like Allergan are also reduced, meaning future cash flows are discounted at a lower rate -- which, in turn, means a higher valuation. This is great news for shareholders.

Of course, not all stocks are affected to the same extent, but the signs appear to be encouraging for Allergan. It is now forecast to deliver earnings-per-share growth of 31% in the year to Dec. 31, 2013, and 14% in the year to Dec. 31, 2014.

This equates to a compound annual growth rate of 22.2%, which marks Allergan as a seriously hot growth stock. Furthermore, if the U.S. economy continues to improve at the rate it's been doing in recent months, upgrades to EPS forecasts could be possible, with a proportion of Allergan's sales being discretionary rather than staples.

This is a point worth noting. Unlike many of its sector peers, which exclusively sell drugs that patients need to get better, Allergan also sells products such as botox, which -- although sometimes needed for the treatment of conditions such as upper limb spasticity -- isn't always a necessity.

Therefore, it could be argued that further improvements in the outlook for U.S. household budgets may mean increased demand for discretionary health-care products such as botox, with Allergan being a possible net gainer.

Of course, Allergan's fundamentals also allow it to hold its own when pitted against sector rivals such as Merck (nyse: mrk) and Pfizer (nyse: pfe). For instance, Allergan's return on equity in 2012 was a very encouraging 18.8%, and with the previously mentioned growth prospects still to come, 2013 and 2014 could be even better.

Allergan's return on equity compares favorably with that of Merck and Pfizer. Their most recent return on equity figures were 11.4% and 11.6%, respectively, although both companies are set to grow earnings at a slightly faster pace than Allergan in 2013 and 2014 (combined), so the gap should narrow somewhat, although Allergan should still be out in front.

Such comparisons highlight the attraction of Allergan as opposed to highlighting the weaknesses of Merck and Pfizer, both of which are exciting pharmaceutical stocks in their own right.

However, it does appear as though Allergan is well positioned to benefit from an improving U.S. economy, having the potential for upgrades to its already highly impressive growth forecasts.

The discretionary nature of its products may also give it a boost as the U.S. economy goes from strength to strength and tapering really takes hold in 2014 and 2015.

Here's another hot growth stock for 2014
There's a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2785262, ~/Articles/ArticleHandler.aspx, 9/3/2015 2:53:14 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Peter Stephens

Peter is a Healthcare Specialist at The Motley Fool.

Today's Market

updated 5 hours ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
AGN.DL $0.00 Down +0.00 +0.00%
Allergan, Inc. CAPS Rating: ****
MRK $52.98 Up +0.45 +0.86%
Merck & Co., Inc. CAPS Rating: ****
PFE $31.97 Up +0.61 +1.95%
Pfizer CAPS Rating: ****