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Why this beaten-up FTSE 100 dividend stock could be a bargain

Today I’m going to look at two beaten-up big cap stocks. For various reasons, both companies are out of favour at the moment. But I believe both have the potential to deliver a rapid rebound.

A special case

Shares of pharmaceutical group Indivior (LSE: INDV) fell more than 35% in one day at the end of August, when the company lost a key legal ruling.

Much of this firm’s profits depend on its market-leading treatment for opioid addiction, Suboxone Film. This tragic problem has reached epidemic proportions in the US, and rival pharmaceutical firms are clamouring to be allowed to sell generic alternatives to.

Indivior is seeking to protect its market share by suing rival firms for alleged patent violations. The stakes are high. Following the August’s legal defeat, management admitted that “a rapid and material loss of market share” could follow “within months” if a generic alternative was allowed onto the market.

Unsurprisingly, Indivior’s management isn’t going to give up without a fight. The firm plans to appeal the August ruling and announced on Friday that it had filed lawsuits against six rivals relating to a new patent that’s applicable to Suboxone Film.

A turnaround opportunity?

This battle may roll on for months or even years. In the meantime, Indivior’s business is doing quite well. Net revenue rose by 5% during the first half of the year, with operating profit up by 23% to $244m. Earnings per share are expected to climb by 9% to 38 cents, putting the stock on a modest forecast P/E of about 10.

Although there’s no dividend, this could change if Indivior manages to secure lasting legal protection for Suboxone Film. Securing this revenue stream could result in strong cash generation and rising profits. The risk is that there’s no way to know how this will turn out, making this stock quite speculative.

Has this sell-off gone too far?

Indivior is too speculative for me, but I am interested in FTSE 100 motor insurance group Admiral Group (LSE: ADM). This firm is splashing out on TV advertising at the moment to promote the launch of its combined home and motor insurance product.

Management may be keen to find a new source of income, after profit growth was crushed by higher costs during the first half of the year. Investors have turned wary since the firm’s half-year results revealed that despite a 15% increase in turnover during the six months to 30 June, pre-tax profit only rose by 2% during the same period.

The shares have fallen by 20% since August, but I think this sell-off may have gone too far. Last week the government announced that the Ogden rate — which affects compensation payouts — will be reviewed after last year’s drastic cut. This decision is expected to result in lower personal injury payout costs for UK insurers and should boost profit margins.

This 6% yield looks safe to me

Admiral’s customer numbers rose by 13% during the first half. If this performance can be maintained, then I’d expect a solid full-year performance.

Analysts expect the firm to return a total of 107.9p to shareholders this year, giving a forecast yield of 6%. This looks affordable to me, based on last year’s free cash flow. I’d rate Admiral stock as a buy.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.