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This article originally appeared on Simply Wall St News
Vertex Pharmaceuticals Incorporated The stock price (NASDAQ: VRTX) has fallen for most of the year and is now 35% below levels it was trading at in July of last year. On Monday, Vertex announced it was launching a Phase 2 clinical trial program for its VX-548 acute pain treatment, which could lead to renewed interest in the action.
Vertex is currently trading at a PE multiple (price divided by EPS) of 19, which is significantly lower than the biotech multiple of 27.8 PE. The broad market PE is also 19, while the market’s profit growth has been lower than Vertex. This implies that the poor performance of the share price may have created an opportunity for investors.
Vertex’s current portfolio includes several therapies for the treatment of cystic fibrosis. These therapies currently represent all of the company’s revenue and cash flow. In addition to cystic fibrosis therapies, Vertex has an extensive portfolio of new therapies at various stages of development. In October of last year, one of those programs was scrapped due to disappointing data, and the share price immediately fell 20%. Last month, a trial for a similar therapy was also dropped, causing the share price to drop another 10%.
The question now is whether the market overreacted to these two developments. Did two therapies that were in early development really represent 30% of the share price, or did the market overreact to the news?
With earnings growth exceeding that of most other companies lately, Vertex Pharmaceuticals is doing relatively well. Many may expect the strong earnings performance to decline, which has kept the P / E from rising. I hope this is not the case so that you can potentially buy stocks when they are no longer in vogue.
Check out our latest review for Vertex Pharmaceuticals
Keen to know how analysts think the future of Vertex Pharmaceuticals compares to that of the industry? In this case, our free report is a great place to start.
How is the growth of Vertex Pharmaceuticals evolving?
In order to justify its P / E ratio, Vertex Pharmaceuticals should generate growth similar to that of the market.
Looking back, we see that the company increased earnings per share by an impressive 81% last year. Over five years, EPS has increased by an average of 45%. Therefore, it is fair to say that profit growth has recently been superb for the company.
Going forward, EPS is expected to decline slightly in 2022, then grow at an average rate of 36% in 2023 and 2024. Longer term, the growth of the current therapy portfolio is expected to slow as the market becomes saturated. However, if the therapies in development are approved for sale, growth could accelerate again. This gives Vertex an option – the potential for new therapies to drive revenue growth.
Vertex Pharmaceuticals P / E result
As a general rule, we prefer to limit the use of the price / earnings ratio to establishing what the market thinks about the overall health of a business. It can also be used to compare companies to their peers and to the overall market. You can check out other rating metrics that also suggest the stock may be undervalued here.
At first glance, Vertex appears to be attractively valued relative to its industry and the market based on growth prospects. Its cash flow is fairly predictable, and the development pipeline offers an option.
The company will release its quarterly results next week, which could lead to changes in analysts’ estimates for next year. As mentioned, profits are expected to decline slightly next year, so there might also be an opportunity to invest at an attractive price at that time.
Another key area for risk analysis is the company’s balance sheet. You can assess many of the main risks with our free Vertex Pharmaceuticals balance sheet analysis with six simple controls.
If you are uncertain about the strength of Vertex Pharmaceuticals’ business , why not explore our interactive list of stocks with solid trading fundamentals for other companies that you may have missed.
Richard Bowman, Simply Wall St and Simply Wall St analyst not have any position in one of the companies mentioned . This article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.
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