Deutsche Bank Echoes Starboard's Sentiment: Perrigo Is Undervalued

Activist investor Starboard Value wrote a letter on Monday to Perrigo Company plc Ordinary Shares PRGO, in which it implored the company to take steps to boost shareholder value as its stock is "deeply undervalued."

Starboard's words were echoed by Gregg Gilbert, an analyst at Deutsche Bank.

Related Link: Perrigo Shares Spike After Starboard Takes 4.6% Stake

In a research report on Tuesday, Gilbert stated that he upgraded Perrigo's stock on July 22 based on the premise that investors would re-focus on Perrigo as a "company with decent growth prospects and durable cash flows."

The analyst also suggested that after meeting with Perrigo's management team, the senior executives are now "more open-minded than ever" to consider strategic alternatives and the timing of Starboard's involvement could help create "multiple routes to value enhancement from the current price."

Related Link: Hedge Funds Issue Open Letter

Gilbert also studied the math behind some of Starboard's suggestions, including the sale of Rx Pharma and/or Tysabri. Here is what the analyst wrote:

"For this analysis, we started with theoretical sale proceeds based on acquisition multiples for Rx Pharma (yields $5.4 billion) and our DCF model for Tysabri (yields $3.1 billion). We applied part of the proceeds to pay down debt in order to maintain a leverage ratio in 2017 similar to our estimate for the overall company, and the balance for share repurchases to offset EPS dilution.

"Our preliminary analysis for the separation of both segments yields EPS dilution of ~22 percent/16 percent/12 percent/10 percent in 2017/18/19/20. The EPS dilution could be more than offset by P/E multiple expansion as investors tend to pay significantly higher multiples for consumer-facing businesses with durable cashflow potential."

Shares of Perrigo remain Buy rated with an unchanged $105 price target.

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