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The More Folks Scrimp, The Better Perrigo Looks


Inside Wall Street

THE MORE FOLKS SCRIMP, THE BETTER PERRIGO LOOKS

When the prospectus for Perrigo landed on Bob Czepiel's desk last fall, he was underwhelmed: yet another obscure company offering stock to the public in yet another reverse leveraged buyout. "I threw it away at first," recalls Czepiel, manager of Robertson Stephens Emerging Growth Fund and one of the surest hands in the small-stock biz. But Czepiel gave the issue a second look--and so did a lot of other investors. Lucky for them: Perrigo has sizzled, and it should remain hot for quite some time.

Perrigo is the largest manufacturer of store-brand pharmaceuticals and personal-care products. The company, which went private in 1988 in a management-led LBO, was taken public by Morgan Stanley and J.P. Morgan on Dec. 17. The price: $16 a share. But Perrigo's NASDAQ-traded stock hasn't changed hands for less than 20 in the ensuing weeks--and now, it's at 32 1/2.

Why is the Street so excited? Well, this 100-year-old, Allegan (Mich.) company is the leader in a fast-growing industry. Private-label products are getting an added boost from recession-weary consumers who are pinching pennies.

You name it, Perrigo makes it: cut-rate but chemically identical versions of Alka-Seltzer, Tylenol, Advil, Actifed, Tums, Oil of Olay, Preparation H, Head & Shoulders, and a host of other brands. The labels carry the name of the retailer--a stellar roster of clients led by Wal-Mart Stores, Kmart, and Walgreen. Although consumers pay much less for Perrigo's products than for name brands, the company's operating profit margins have been handsome--11% has been typical in recent years. Says Czepiel: "It's a no-lose situation for everybody--except the makers of the original products."

OFF A DUCK'S BACK. Perrigo has had to defend itself against a stream of legal challenges from peeved pharmaceutical companies, but none of the suits has drawn blood. The company also faces competition from a host of small competitors, but those companies are fragmented along geographic and product lines. And its rivals' ranks were recently reduced when Perrigo purchased private-label product purveyor Cumberland-Swan.

With such a firm hold on the store-brand market, Perrigo has been a roaring success. The company realized profits of $12.2 million from $281 million in sales in the fiscal year that ended last June 30. Earnings have nearly quadrupled over the past three years, and in the quarter that ended Sept. 30, profits tripled over the year before. Czepiel estimates that earnings will rise to 70c a share in the fiscal year ending June 30, vs. 41c a year before, with $1.10 likely in 1993. That's a price-earnings ratio of 50 on current earnings, which is hefty but justifiable, given the company's growth prospects. It looks like the party at Perrigo may be just beginning.GARY WEISS


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