Eagle Pharmaceuticals Stock Is Believed To Be Modestly Undervalued

GuruFocus.com
·4 min read

- By GF Value

The stock of Eagle Pharmaceuticals (NAS:EGRX, 30-year Financials) appears to be modestly undervalued, 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 $40.67 per share and the market cap of $533.2 million, Eagle Pharmaceuticals stock appears to be modestly undervalued. GF Value for Eagle Pharmaceuticals is shown in the chart below.


Eagle Pharmaceuticals Stock Is Believed To Be Modestly Undervalued
Eagle Pharmaceuticals Stock Is Believed To Be Modestly Undervalued

Because Eagle Pharmaceuticals is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which is estimated to grow 5.20% annually over the next three to five years.

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. Eagle Pharmaceuticals has a cash-to-debt ratio of 2.78, which ranks in the middle range of the companies in Drug Manufacturers industry. Based on this, GuruFocus ranks Eagle Pharmaceuticals's financial strength as 7 out of 10, suggesting fair balance sheet. This is the debt and cash of Eagle Pharmaceuticals over the past years:

Eagle Pharmaceuticals Stock Is Believed To Be Modestly Undervalued
Eagle Pharmaceuticals Stock Is Believed To Be Modestly Undervalued

It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Eagle Pharmaceuticals has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $187.8 million and earnings of $0.87 a share. Its operating margin is 17.55%, which ranks better than 81% of the companies in Drug Manufacturers industry. Overall, the profitability of Eagle Pharmaceuticals is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Eagle Pharmaceuticals over the past years:

Eagle Pharmaceuticals Stock Is Believed To Be Modestly Undervalued
Eagle Pharmaceuticals Stock Is Believed To Be Modestly Undervalued

Growth is probably the most important factor 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. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Eagle Pharmaceuticals is -2.9%, which ranks worse than 74% of the companies in Drug Manufacturers industry. The 3-year average EBITDA growth rate is -23.6%, which ranks worse than 84% of the companies in Drug Manufacturers industry.

Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Eagle Pharmaceuticals's ROIC was 12.95, while its WACC came in at 5.36. The historical ROIC vs WACC comparison of Eagle Pharmaceuticals is shown below:

Eagle Pharmaceuticals Stock Is Believed To Be Modestly Undervalued
Eagle Pharmaceuticals Stock Is Believed To Be Modestly Undervalued

Overall, the stock of Eagle Pharmaceuticals (NAS:EGRX, 30-year Financials) appears to be modestly undervalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 84% of the companies in Drug Manufacturers industry. To learn more about Eagle 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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