What happened

Shares of Perrigo Company (NYSE:PRGO) rose over 20% this morning after the healthcare leader released second-quarter 2017 financial results and adjusted full-year 2017 guidance. While revenue slipped 8% from the year-ago period, that was mostly caused by its divesting from unprofitable businesses late last year. Adjusted for those divestitures, sales increased year over year.

Growth in the top line is great, but Wall Street is swooning over improved operational efficiency. Profitability, or the promise that it's within sight after a painful recalibration of the company, is the main driving force for the stock today. As of 11:49 a.m. EDT, the stock had settled to an 18.9% gain. 

A cartoon of a bar chart showing growth, with the last bar column represented by a red arrow on a springboard.

Image source: Getty Images.

So what

The performance for the first half of 2017 does a better job of communicating the year-over-year improvements at Perrigo Company than looking at only the most recent quarter, although much of the change in income is the result of major one-time impairment charges that were taken in 2016. 

Metric

1H 2017

1H 2016

% Change

Revenue

$2.43 billion

$2.68 billion

(9.5%)

Gross margin

39.8%

40.2%

(0.7%)

Operating income

$277.3 million

($46.8 million)

N/A

EPS

$0.01

($7.43)

N/A

Data source: Securities and Exchange Commission filings.

Nonetheless, management is executing against the strategy laid out to make Perrigo Company a more profitable, more efficient, and healthier business. Since the end of December 2016, long-term debt has been reduced by $1.9 billion, or 37%. That will save the company over $20 million per year in interest expenses, which amounts to an earnings boost of $0.14 per share. 

Management also updated its full-year 2017 guidance as follows:

  • Reported diluted EPS (a GAAP metric) will be in the range of $0.84 to $1.09, compared to the previously reported range of $1.82 to $2.17.
  • Adjusted diluted EPS (a non-GAAP metric) will be in the range of $4.45 to $4.70, compared to the previously reported range of $4.15 to $4.50.

Now what

Perrigo Company shareholders have seen the stock price fall by 60% since the mid-2015 peak, and that includes today's gains. While it hasn't been fun, there are signs that management is moving the company into a better financial position. Still, as costs fall and margins improve in the years ahead, investors need to see GAAP EPS increase -- that's the long-term driver of any business.

Maxx Chatsko has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.