Research Request: Mylan, Inc. (MYL)

A reader request that I do some research on Mylan (MYL) back on 8/7.  On that day, MYL closed at $13.19. Today, it closed at $15.59 which is 18% higher.  Since Mylan used pay dividend but halted distributions in 3Q07 (but kept preferred shares dividend), investor will be investing for capital gain basis. With that, my model is based on earning, cash flow, and book value. My knowledge of pharmaceutical is limited but you don't need to know everything about the business as long as you can place a valuation on a stock. Let's take a look at Mylan.
Mylan engage in the generic pharmaceutical market. They do everything from development, manufacture, marketing, licensing, and distribution of their products. Check out their website for more detail about Mylan.
After obtaining data from Valueline, my model shows that Mylan is approaching fair value of $21.75. My "bargain" price is at $8.25. Another price target is the "buy" price of $16. Given that Mylan is at $15.60, your risk is 47% (8.25/15.60 - 1) and upside of 39% (21.75/15.60 -1). Risk / reward analysis tells me to be a seller not a buyer at this level. Let's dive deeper and see if there are more reasons for me to be a buyer or seller.
A closer look at  the balance sheet revealed a concerning story. Mylan engaged in many acquisitions and I am not the one to tell you if they were in fact good or bad acquisitions. I do not have the ability or capability to estimate what those future cash flow or earning will be. What I do know is that due of those acquisitions, Mylan had to raise  debt and take hit to their cash flow and earning. Not a good combination. Their debt level was $30.6 million in 1999. That figure rose to $51.3 Billion (with a B) in 2009, a 67% increase on a compound annual basis. At the same time their cash flow rose 15%, earning rose 6%, and book value rose 8%.
Currently, Mylan is trading at 17x trailing P/E, 10x F P/E, and 1.7x P/B. It may appeared to be "cheap" but a large debt over hang scares me. Debt due in five years is $145 million. If Mylan doesn't make enough to pay back their debt, they would have to refinance their debt at a time when I expect the interest rate to be at a much higher level. While cutting common stocks dividend, the company kept preferred dividend, issued more stocks, and raised more debt. I can't see why this is good for the common shareholders. As stated above, if price fall to $8.25 then I may consider it.
This is just one man's opinion. To get additional analysis, I recommend you cross check my analysis with Morningstar (report can be obtain freely from your local library), S&P (I get that from TDAmeritrade), or Valueline.


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