PHILIP TASHO
PORTFOLIO MANAGER
ABN AMRO/TAMRO SMALL CAP VALUE FUND

COMPANY: Perrigo
TICKER: PRGO (Nasdaq)
PRICE: $16.26 (as of 4 p.m. yesterday)
52-WEEK RANGE: $12.76-$19.59
MARKET CAPITALIZATION: $1.51 billion

Philip Tasho is a portfolio manager with the ABN AMRO/TAMRO Small Cap Fund (ATASX), which has returned 28.2% annually over the last three years. On February 24, Mr. Tasho spoke to David Dalley of The New York Sun about Bob Evans Farms. Since that date, the stock is up about 3.4%. Today he speaks to the Sun about another of his favorites, Perrigo.

What does Perrigo do?

They’re the largest manufacturer of over-the-counter pharmaceuticals for store brands like CVS or Rite Aid. Things like antacids, nasal sprays, etc.

Why do you like the stock?

This last flu season was a tough one and so sales were relatively light. There was also an issue with Pseudoephedrine, which is the active ingredient in decongestants. The government has mandated the elimination of the substance, so they’ve had to replace what was on the market. Earnings were down about 6% this past year, but that was a seasonal, short-term aberration. Everything comes back to the norm. The valuation is depressed because of the shortfall in earnings, and that’s part of why we like the stock. They’re the leader in this segment, and we like to buy the best companies when they’re depressed. The upside opportunity relative to the downside risk is very attractive.

They also recently acquired Agis Industries, which has brought them into a new business segment: the generic pharmaceutical business. That’ll be a new growth supplement for the company, especially now as a lot of drugs go off patent. Agis is the third-largest distributor of generics.

What do you think the stock’s worth?

The stock is selling at around 20 times earnings for 2006, and roughly 17 times forward earnings. We expect them to get back to a multiple of about 30 over the next 12 to 18 months, which is what they’ve been trading at, on average, over the last 10 years. That’d put the stock up at about $24.

What’s driving growth?

New products, for one, as they develop new over-the-counter medications. Also, as drugs go off patent, their market size increases. They’re also further expanding their presence, not only in drugstores, but also now in places like Wal-Mart and Kmart. That’ll drive growth, too.

Why is now the time to buy?

We expect earnings to re-accelerate this year, partly due to the acquisition and partly because they have a number of new over-the-counter products coming out. They’re the market leader, they have an attractive valuation right now, and the downside is limited. Their particular market segment is very strong right now.

What are the risks?

That the flu season is benign again. We look at the downside risk, in terms of a multiple, and our downside for this stock is a multiple of about 16, which is at about the $14 level.