Shares of Avantor Are Down -5.4% -- Are They Valued Fairly?

Specialty Chemicals company Avantor is taking Wall Street by surprise today, falling to $19.43 and marking a -5.4% change compared to the S&P 500, which moved 2.3%. AVTR is -36.53% below its average analyst target price of $30.61, which implies there is more upside for the stock.

As such, the average analyst rates it at buy. Over the last year, Avantor has underperfomed the S&P 500 by -31.8%, moving -49.1%.

Avantor, Inc. provides products and services to customers in biopharma, healthcare, education and government, advanced technologies, and applied materials industries in the Americas, Europe, Asia, the Middle East, and Africa. The company belongs to the basic materials sector, which includes the chemical, coal, mining, aluminum, and steel industries. The demand for these materials is dependent on economic cycles: when the economy is growing, companies across all sectors ramp up production, which increases demand from basic materials companies.

Conversely, when the economy slows down, demand for these materials decreases. The stock prices of this sector tend to follow the ebbs and flows of these demand cycles -- but accurately predicting where we are presently in the economic cycle is a matter of intense debate.

Avantor's trailing 12 month P/E ratio is 21.4, based on its trailing Eps of $0.91. The company has a forward P/E ratio of 12.7 according to its forward Eps of $1.53 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the basic materials sector has an average P/E ratio of 8.57, and the average for the S&P 500 is 15.97.

A significant limitation with the price to earnings analysis is that it doesn’t account for investors’ growth expectations in the company. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. Conversely, companies with high P/E ratios may be fairly valued in terms of growth expectations.

When we divide Avantor's P/E ratio by its projected 5 year earnings growth rate, we see that it has a Price to Earnings Growth (PEG) ratio of 0.97. This tells us that the company is largely undervalued in terms of growth expectations -- but remember, these growth expectations could turn out to be wrong!

An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Avantor's gross profit margin trends:

  • 2021 gross margins: 33.9 %
  • 2020 gross margins: 32.5 %
  • 2019 gross margins: 31.8 %
  • 2018 gross margins: 31.0 %
  • Average gross margin: 32.3 %
  • Average gross margin growth rate: 3.0 %
  • Coefficient of variability (lower numbers indicating more stability): 3.8 %

While not the strongest, Avantor's gross margins indicate that its underlying business is viable, and that the stock is potentially worthy for investment -- as opposed to speculative -- purposes.

To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Avantor's free cash flow, which was $842,500,000.00 as of its most recent annual report.

This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, AVTR is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 90.0% and has on average been $543,975,000.00.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Avantor's P/B ratio is 2.9 -- in other words, the market value of the company exceeds its book value by a factor of more than 2, so the company's assets may be overvalued compared to the average P/B ratio of the Basic Materials sector, which stands at 1.86 as of the third quarter of 2022.

Avantor is likely fairly valued at today's prices because it has an inflated P/E ratio, an average P/B ratio, and an irregular stream of positive cash flows with an upwards trend. The stock has strong growth indicators because of its consistently average gross margins that are increasing, and a PEG ratio of less than 1. We hope this preliminary analysis will encourage you to do your own research into AVTR's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.

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The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.