Perrigo (PRGO) Q2 Earnings: Stock Likely To Disappoint?

Perrigo Company plc (NYSE:PRGO) is scheduled to report second-quarter 2016 results on Aug 10, before the opening bell. Perrigo has a pretty good track record with the company beating earnings estimates in three of the last four quarters with an average positive earnings surprise of 1.44%. In the last reported quarter, Perrigo recorded a positive earnings surprise of 1.16%.

Let’s see how things are shaping up for the company for this announcement.

Factors at Play This Quarter

In Apr 2016, Perrigo provided a dismal earnings guidance for 2016, which it reiterated at the time of announcing first-quarter results. The company expects earnings in the range of $8.20 to $8.60 per share. Previously, it had guided earnings in the range of $9.50 to $9.80 per share. The company said that the cut in the earnings guidance was owing to a reduction in pricing expectations in the Rx Pharmaceuticals segment due to industry and competitive pressure in the sector.

Perrigo expects price erosion of approximately 6% for the remainder of the year at the Rx segment. Softness in pricing is due to several factors including increased focus from customers to capture supply chain productivity savings and low raw material commodity pricing, competition in specific products, and consolidation of certain customers. The company expects this softness to continue impacting its fundamentals through 2016. The company expects Rx segment to record net sales of approximately $1.2 billion in 2016.

The reduction was also due to a weaker performance expected within the Branded Consumer Healthcare (BCH) segment over the next three quarters as well as low expectations for consolidated new product launches. The company expects the BCH segment to record net sales of approximately $1.4 billion in 2016.

Perrigo lowered its net sales guidance for 2016 at the time of announcing first-quarter results. It expects nets sales in the range of $5.6–$5.9 billion (adjusted to reflect new product delays) in 2016. Previously, the company had guided net sales in the range of $$5.9–$6.2 billion. It anticipates greater than $300 million from new product launches in 2016, compared with the previous expectation of more than $400 million, primarily due to changes related to regulatory approvals for certain new products, and modified market share penetration assumptions and timing of new products in Europe.

The company expects the Consumer Healthcare segment to record net sales of approximately $2.65 billion in 2016. A delay in new product launches, along with softness in pricing in the segment, is expected to impact the segment’s performance through 2016.

On the second-quarter call, investor focus will be on the company’s performance as well as that of its business segments.

Earnings Whispers?

Our proven model does not conclusively show that Perrigo is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below.

Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -2.00%. This is because the Most Accurate estimate is currently at $1.96 per share, while the Zacks Consensus Estimate stands higher at $2.00.

Zacks Rank: Perrigo’s Zacks Rank #3 increases the predictive power of the ESP but when combined with a negative ESP makes a surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some health care stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.

The Earnings ESP for Ionis Pharmaceuticals, Inc. (NASDAQ:IONS) is +27.08% and carries a Zacks Rank #2. It is scheduled to report second-quarter results on Aug 9.

Alcobra Ltd. (NASDAQ:ADHD) has an Earnings ESP of +18.18% and carries a Zacks Rank #3. It is expected to report second-quarter results on Aug 11.

Seres Therapeutics, Inc. (NASDAQ:MCRB) has an Earnings ESP of +14.29% and carries a Zacks Rank #3. It is scheduled to report second-quarter results on Aug 11.