Vertex Pharmaceuticals Stock Is Believed To Be Possible Value Trap

GuruFocus.com
·4 min read

- By GF Value

The stock of Vertex Pharmaceuticals (NAS:VRTX, 30-year Financials) shows every sign of being possible value trap, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $214.64 per share and the market cap of $55.8 billion, Vertex Pharmaceuticals stock is believed to be possible value trap. GF Value for Vertex Pharmaceuticals is shown in the chart below.


Vertex Pharmaceuticals Stock Is Believed To Be Possible Value Trap
Vertex Pharmaceuticals Stock Is Believed To Be Possible Value Trap

The reason we think that Vertex Pharmaceuticals stock might be a value trap is because

Link: These companies may deliever higher future returns at reduced risk.

Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Vertex Pharmaceuticals has a cash-to-debt ratio of 7.15, which ranks in the middle range of the companies in Biotechnology industry. Based on this, GuruFocus ranks Vertex Pharmaceuticals's financial strength as 8 out of 10, suggesting strong balance sheet. This is the debt and cash of Vertex Pharmaceuticals over the past years:

Vertex Pharmaceuticals Stock Is Believed To Be Possible Value Trap
Vertex Pharmaceuticals Stock Is Believed To Be Possible Value Trap

Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Vertex Pharmaceuticals has been profitable 5 years over the past 10 years. During the past 12 months, the company had revenues of $6.2 billion and earnings of $10.3 a share. Its operating margin of 46.24% better than 97% of the companies in Biotechnology industry. Overall, GuruFocus ranks Vertex Pharmaceuticals's profitability as fair. This is the revenue and net income of Vertex Pharmaceuticals over the past years:

Vertex Pharmaceuticals Stock Is Believed To Be Possible Value Trap
Vertex Pharmaceuticals Stock Is Believed To Be Possible Value Trap

Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Vertex Pharmaceuticals's 3-year average revenue growth rate is better than 81% of the companies in Biotechnology industry. Vertex Pharmaceuticals's 3-year average EBITDA growth rate is 201.7%, which ranks better than 100% of the companies in Biotechnology industry.

One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Vertex Pharmaceuticals's ROIC is 66.05 while its WACC came in at 5.28. The historical ROIC vs WACC comparison of Vertex Pharmaceuticals is shown below:

Vertex Pharmaceuticals Stock Is Believed To Be Possible Value Trap
Vertex Pharmaceuticals Stock Is Believed To Be Possible Value Trap

In summary, the stock of Vertex Pharmaceuticals (NAS:VRTX, 30-year Financials) gives every indication of being possible value trap. The company's financial condition is strong and its profitability is fair. Its growth ranks better than 100% of the companies in Biotechnology industry. To learn more about Vertex Pharmaceuticals stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.

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