Biotechnology company Moderna, Inc. is taking Wall Street by surprise today, surging to $138.95 and marking a 5.1% change after EU regulatos approved its Omicron variant vaccine. MRNA is now -37.24% below its average analyst target price of $221.4, which implies there is more upside for the stock. As such, the average analyst rates it at buy. Over the last year, Moderna, Inc. has underperfomed the S&P 500 by 53.9%, moving -66.7%.
Moderna, Inc. is part of the healthcare sector, which includes the biotechnology, drug manufacturing, diagnostic and research, and medical supplies industries. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.
As of the second quarter of 2022, the average Price to Earnings (P/E) ratio for US healthcare companies is 15.91, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes. Moderna, inc.'s trailing 12 month P/E ratio is 4.4, based on its trailing Eps of $31.73. The company has a forward P/E ratio of 16.9 according to its forward Eps of $8.22 -- which is an estimate of what its earnings will look like in the next quarter.
Earnings are the most widely used metric for understanding a stock's valuation. When considered alongside the company's revenue growth, they can also give insight into the company's margins, which in turn can allow us to make inferences about its possible competitive advantages. Moderna, inc.'s year on year (YOY) quarterly earnings decreased at a rate of -18.9% and its YOY quarterly revenue grew at a rate of 9.1%. Since earnings are growing at a slower rate than revenue, the company's profit margins are shrinking as a result of increases in the their tax liabilities, decreasing product prices, an increase in overhead, or a rise of the cost of goods sold.
In contrast to earnings, gross profit margins are the company's revenue minus the cost of goods only, and don't take into account taxes and overhead. Analyzing gross profit margins as opposed to net (operating) margins gives a better picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof. MRNA has gross profit margins of 71.7%, which indicates that it potentially benefits from a sustained competitive advantage over its peers, allowing it to maintain highly profitable pricing structures.
Companies have many other costs and sources of income occurring outside of their core business. Everything from equipment depreciation, returns on capital investments, legal costs, income from intellectual property, and interest payments on debt factor into the company's ultimate profitability. We can see the effect of these additional factors in Moderna, Inc.'s levered free cash flow of $5,095,124,992. This represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cashflow, MRNA is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Moderna, inc. has a P/B ratio that indicates that the market value of the company exceeds its book value by a factor of 3. In contrast, the average P/B ratio of the Healthcare sector, which stood at 4.12 as of the second quarter of 2022.
Since it has a very low P/E ratio, a low P/B ratio, excellent profit margins, an analyst consensus of strong upside potential, and strong cash flows, Moderna, inc. is likely undervalued at today's prices. We hope you enjoyed this overview of MRNA's fundamentals. Before you reach your own decision, be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
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