Shire rallies as Exane says it's just too cheap

Pharmaceuticals group Shire was the standout gainer on the FTSE 100 on Monday as Exane BNP Paribas said the stock looked too cheap.

The bank said it was selling its position in Swiss pharma company Roche and switching into Shire.

“Shire, on a forward P/E of just 12 for top line growth of 14% this year and EPS growth of 20% just looks too cheap,” Exane said.

It said much of the cheapness was due to some disillusion with Shire’s pursuit of Baxalta, which many investors see as diluting the company’s long-term growth path and others see simply as a move to shift Shire’s market capitalisation out of the M&A target zone.

“The transaction, around 2/3rds in shares, has also created a significant flow of risk-arbitrage short selling which has depressed the share price,” Exane said.

Exane said that whatever management’s reasoning is behind the deal, “it doesn’t look such a bad long term move to us” and certainly not bad enough to justify a price/earnings to growth ratio of 0.6x.

It noted that by comparison, Roche – which has EPS growth forecast at 6% and a P/E of 17.5x – sports a PEG ratio of almost 3.

Shire announced in January that it had agreed a $32bn takeover of US-based Baxalta after a six-month pursuit.

The stock fell sharply in the wake of the deal announcement and is down around 15% year-to-date.

When Exane upgraded Shire to ‘outperform’ back in January, it said the stock’s valuation was compelling whether you liked the fundamentals of the deal or not.

It said in its note at the time:”We downgraded the stock following the first Baxalta bid on the basis that we were entering a prolonged period of uncertainty over price and timing.

“Over the subsequent five months Shire's share price fell approximately 25%. Now we have clarity on the Baxalta deal and whilst it may not have been the best M&A opportunity in our view, it is nonetheless a value-enhancing deal.”

At 1210 GMT, Shire shares were up 3.7% to 3,829p.