FRX Forest Road Acquisition Corp

Following the release of second quarter fiscal 2012 results on October 18, 2011, most of the analysts covering Forest Laboratories (FRX) have made downward revisions to their earnings estimates for fiscal 2012 and 2013. The downward revision in estimates is mainly in response to the company’s disappointing performance in the recently reported quarter and concerns regarding the company’s ability to achieve guidance.

Second Quarter Highlights

Forest Labs reported disappointing second quarter results with earnings per share coming in at 91 cents, well below the Zacks Consensus Estimate of 99 cents and the year-earlier earnings of $1.00. Despite an increase in revenues, higher costs led to the decline in earnings.

Second quarter revenues increased 7.4% to $1.17 billion, with net sales increasing 9.0% to $1.1 billion. Total revenues topped the Zacks Consensus Estimate of $1.15 billion.

Adjusted SG&A expense increased 22.9% to $388.7 million in the reported quarter. The company continues to focus on promoting its new products and expects SG&A spend to remain at similar levels through the remainder of the year. Adjusted R&D spend increased 10.4% during the quarter.

A detailed discussion of second quarter results is available here: Forest Labs Disappoints

Agreement of Estimate Revisions

There is a significant negative bias in earnings estimate revisions for Forest Labs. Following the release of second quarter results, 16 of the 23 analysts following the stock lowered their estimates for fiscal 2012. Meanwhile, 15 of the 24 analysts following Forest Labs reduced their estimates for fiscal 2013.

During this period, only 1 analyst moved in the opposite direction for fiscal 2012. Meanwhile, there were no upward revisions for fiscal 2013.

Concerns regarding the performance of new products and the company’s ability to achieve guidance have driven the downward revision in estimates.

Magnitude of Revisions

Estimates for fiscal 2012 have gone down by 9 cents following the release of second quarter results. The current Zacks Consensus Estimate of $3.65 is within Forest Labs’ guidance of $3.60 - $3.70 per share. Fiscal 2013 estimates are down 8 cents to $1.16 per share – the company expects to earn at least $1.20 in fiscal 2013.

Our Recommendation

Following the release of disappointing second quarter results, we downgraded Forest Labs to Underperform. The company carries a Zacks Rank of #5 which translates into a short-term rating of Strong Sell. We remain concerned that Forest Labs will keep spending at high levels in support of new product launches. We are also disappointed with the performance of new products which are ramping below expectations. With Forest Labs facing a major patent cliff in March 2012 when lead product Lexapro is slated to lose exclusivity, the company might find it challenging to achieve its guidance. All these factors have led us to downgrade the stock to Underperform.

 
FOREST LABS A (FRX): Free Stock Analysis Report
 
Zacks Investment Research