5-Star Stocks Poised to Pop: Endo Pharmaceuticals

Based on the aggregated intelligence of 165,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, drug company Endo Pharmaceuticals Holdings (Nasdaq: ENDP) has earned a coveted five-star ranking.

With that in mind, let's take a closer look at Endo's business and see what CAPS investors are saying about the stock right now.

Endo facts

Sources: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS.

On CAPS, 96.5% of the 462 members who have rated Endo believe the stock will outperform the S&P 500 going forward. These bulls include JustHanginOut and All-Star MagicDiligence.

Two months ago, JustHanginOut highlighted Endo as the perfect portfolio painkiller:

Great opportunity to buy a great company with very impressive revenue and earnings growth. They specialize in products that treat pain and their product line includes well-known prescriptions. ... I think they have a nice little niche and I'm confident that the growth will continue for at least the next couple of years.

Endo might not attract as much attention as its megacap drug brothers, but its leading position in pain management continues to have Fools singing its praises. In fact, Endo's flagship moneymaker, Lidoderm, didn't gain any real traction until safety concerns began to swirl around the painkillers offered by Merck (Vioxx) and Pfizer (Bextra) in the mid-2000's. With the stock trading at a paltry single-digit P/E, CAPS All-Stars like MagicDiligence think Endo looks like a reasonable value. Here's an excerpt from a pitch written last spring:

All told, Endo will likely see solid growth into 2012, at which time generic competition could eat as much as half of current revenues. This uncertainty will keep the valuation high on an earnings yield basis.

The other two factors, competitive position and financial health, are positives. Endo, like all branded pharmaceuticals, enjoys strong regulatory barriers to entry through patent protection. ... Another competitive advantage is Endo's large 800-person sales staff that focuses on the niche of pain management. This sales department is considered one of the most productive in the industry, and should be an important factor in quickly growing sales of acquired products.

Financial health is fine. ... Free cash flow is outstanding, averaging almost 30% of sales over the past 5 years. This cash flow will help the company acquire new compounds to plug their upcoming sales gaps.

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