Watson Pharmaceuticals, Inc. (WPI) reports fourth-quarter results on February 23, with the current Zacks Consensus Estimate at 72 cents per share. Estimates appear to be modestly up, with one of the 16 analysts covering the stock raising fourth quarter estimates in the last 30 days.
In terms of earnings surprises, Watson had a modest positive surprise in the third quarter and a 7% positive surprise in the second quarter of 2009, with the four-quarter average of 8%. (This means, on average, Watson has come ahead of the Zacks Consensus by 8% over the last four quarters.) If quarterly results come in-line with expectations, fourth quarter 2009 EPS would be 35.8% above the year-ago level. However, chances are high that there could be a positive surprise of 1.4% for the upcoming quarter.
Overall, Watson’s earnings performance has been good. The company recently announced that it expects 2009 earnings to meet or exceed guidance provided in Nov. 2009. Watson had earlier guided towards earnings in the range of $2.50 – $2.58 per share. Watson also announced that it expects revenues to increase 9% year over year to $2.7 billion in 2009. For the full-year 2009, the current Zacks Consensus Estimate is $2.56, up modestly in the last 7 days. If full year results are in-line with expectations, 2009 EPS would be 26% above the year-ago level. However, there could be a positive surprise of 0.78% for full year 2009.
Watson should continue performing well in 2010. Soon after announcing preliminary results for 2009, Watson announced its outlook for 2010 and beyond. The company is forecasting double-digit annual cash earnings per share growth for 2010-2012 with 2010 revenues expected in the range of approximately $3.5 billion.
The company expects cash EPS of $3.05 – $3.30 in 2010. The current Zacks Consensus Estimate of $3.20, representing year-over-year growth of roughly 25%, is up from the previous estimate of $2.93, with one of the four analysts covering the stock raising their estimates for 2010 in the last 7 days.
We believe that the company’s cost-savings initiative and new product launches, both brand and generic, will help drive growth. Following the recent acquisition of Arrow, Watson now boasts of a larger product portfolio, an enhanced pipeline of new products, and access to established and emerging markets; all of which should bode well for long-term growth. Generics segment revenues are expected to come in at approximately $2.3 billion in 2010.
In addition to strengthening its generics business, Watson is working on growing its branded business, which is expected to post revenues around $460 million in 2010. Continued growth of existing products and new product launches should help drive growth in this segment. Long-term growth should be driven by the company’s focus on expanding its urology and female healthcare product portfolio. Distribution segment revenues are expected around $700 million in 2010.
Meanwhile, Watson announced that it realized savings of more than $40 million through its Global Supply Chain Initiative and additional savings through other supply chain cost initiatives. With the company continuing to streamline operations, increase productivity and reduce material costs, we expect Watson to reap additional benefits from its cost-saving initiatives in 2010 and beyond.
We currently have a Neutral recommendation on the stock, which is supported by a Zacks #3 Rank (‘hold’). Watson operates in the highly competitive pharmaceutical industry, where it faces competition from generic players like Teva (TEVA), Mylan (MYL), Dr. Reddy’s (RDY), Sandoz and Par Pharma (PRX), among others.
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