Orion
During the past week I added Orion to our porfolio. It's a Finnish pharmaceuticals and diagnostics company that derives most of its sales from Europe. Orion pays out most of its profits as dividends. From 2011 it is expected to pay dividend which gives approximately 8,5% yield at current stock price (14,27 euros). I continuously screen Finnish companies and currently Orion is top on that list. The reasons for that are:
- Good past growth
- Good margins
- Excellent ROA, ROI and ROE
- High dividend yield
- Moderate valuation (currently P/E 2011 below 10)
Orion has demonstrated steady growth during last years and had net sales of 849,9 EUR million in 2010. Orions return on equity is excellent. It has been over 30% between 2006 and 2010 reaching 40,7% in 2010 after taxes. Most of company´s net sales comes from two segments
- Patent protected "proprietary products" 44%
- Specialty products 35%
As with all other companies in the pharmaceuticals sector expiry of patents is topical for Orion too. The most important Parkinson's drug patents and product protections will expire in 2012-2013. These drugs contributed 252,7 EUR million to the top line in 2010. I believe patent expirations are already discounted in the stock price and explain the low valuations.
Hi Ultralong,
ReplyDeleteFirst of all, congratulations for your blog.
This company has had a good performance during the last years, the balance sheet appears to be very solid. The payout ratio is probably too high. Why do you think the patent cliff is already entirely discounted? 2012 is really around the corner and some amount of the 30% of the revenue are going to be threatened by generic competition. What do you think about the pipeline for 2012-2013?
BR,
I don't think the payout ratio is too high. It has been consistently between 90-100% from 2006 to 2010. It has actually come gradually down
ReplyDeleteduring those years (from 100% to close to 90%). They can sustain high payout ratio as long as they do not need the money elsewhere
(significant capital expendinture or corporate/product acquisitions). Naturally an outsider can never know what management is planning for future.
So far they have clearly thought that investors can achieve better returns than Orion with the excess money. Many companies retain excess
profits as cash or cash equivalents. If company does not have a good plan how to put that money to work profitably then it should be returned
to stockholders, for example, as dividends.
The reason why I think patent cliff is already fully discounted is the fact that this is widely followed stock in Finland and probably by
major stockholders / potential stockholders around the world. Information about impending loss of patent protection has been in news for a long time know.
Market has a habit of discounting all known information to stock price. Please see my follow-up post about Orion & patents to be posted soon..
Hi Ultralong,
ReplyDeleteThanks for your response and comments.
I agree with you about dividends. Cash, to a certain extent, should return to shareholders every year if company it's not going to get returns above the cost of capital. But a high payout ratio has also the side effect that slashing the dividend in the bad years to adjust it to earnings or to devote it to capex to face a cliff, usually brings you back a strong selling response from some of your investors and is usually the last thing you're willing to do.
But in this case, with very little or no debt, you probably can afford a high payout ratio. I find truly valuable that goodwill is a little part of the assets too.
I'm reading your next post.
BR,