Alkermes PLC Stock Is Believed To Be Modestly Overvalued
- By GF Value
The stock of Alkermes PLC (NAS:ALKS, 30-year Financials) is believed to be modestly overvalued, 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 $23.08 per share and the market cap of $3.7 billion, Alkermes PLC stock appears to be modestly overvalued. GF Value for Alkermes PLC is shown in the chart below.
Because Alkermes PLC is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 3.6% over the past three years and is estimated to grow 4.13% annually over the next three to five years.
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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. Alkermes PLC has a cash-to-debt ratio of 1.26, which ranks worse than 81% of the companies in Biotechnology industry. Based on this, GuruFocus ranks Alkermes PLC's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Alkermes PLC over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Alkermes PLC has been profitable 1 over the past 10 years. Over the past twelve months, the company had a revenue of $1 billion and loss of $0.601 a share. Its operating margin is -8.76%, which ranks better than 71% of the companies in Biotechnology industry. Overall, the profitability of Alkermes PLC is ranked 3 out of 10, which indicates poor profitability. This is the revenue and net income of Alkermes PLC over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Alkermes PLC is 3.6%, which ranks in the middle range of the companies in Biotechnology industry. The 3-year average EBITDA growth is 43.7%, which ranks better than 85% of the companies in Biotechnology industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Alkermes PLC's return on invested capital is -10.03, and its cost of capital is 5.57. The historical ROIC vs WACC comparison of Alkermes PLC is shown below:
In closing, The stock of Alkermes PLC (NAS:ALKS, 30-year Financials) appears to be modestly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks better than 85% of the companies in Biotechnology industry. To learn more about Alkermes PLC stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
