Let's Take a Closer Look at the Fundamentals of DXCM

One of Wall Street's biggest winners of the day is DexCom, a medical devices company whose shares have climbed 17.6% to a price of $119.09 -- 11.24% above its average analyst target price of $107.06.

The average analyst rating for the stock is buy. DXCM may have outstripped the S&P 500 index by 15.3% so far today, but it has lagged behind the index by 17.7% over the last year, returning -35.0%.

DexCom, Inc., a medical device company, focuses on the design, development, and commercialization of continuous glucose monitoring (CGM) systems in the United States and internationally. The company is categorized within the healthcare sector. The catalysts that drive valuations in this sector are complex. From demographics, regulations, scientific breakthroughs, to the emergence of new diseases, healthcare companies see their prices swing on the basis of a variety of factors.

DexCom's trailing 12 month P/E ratio is 283.5, based on its trailing Eps of $0.42. The company has a forward P/E ratio of 108.3 according to its forward Eps of $1.1 -- 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 healthcare sector has an average P/E ratio of 13.21, and the average for the S&P 500 is 15.97.

DXCM’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.

When we perform the calculation for DexCom, we obtain a PEG ratio of 4.13, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.

To gauge the health of DexCom's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good 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.

DXCM's average gross profit margins over the last four years are 65.6%, which indicate it has a potential competitive advantage in its market. These margins have slightly increased over the last four years, with an average growth rate of 2.2%. Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From DexCom's last four annual reports, we are able to obtain the following rundown of its free cash flow:

  • 2021 free cash flow: $53,300,000.00
  • 2020 free cash flow: $276,600,000.00
  • 2019 free cash flow: $134,500,000.00
  • 2018 free cash flow: $56,100,000.00
  • Average free cash flow: $130,125,000.00 %
  • Average free cash flown growth rate: 54.9 %
  • Coefficient of variability (the lower the better): 80.4 %

Free cash flow 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 a positive cash flow as of the last fiscal year, DXCM 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 (market value divided by 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.

DexCom's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 20, so the company's assets may be overvalued compared to the average P/B ratio of the Healthcare sector, which stands at 4.07 as of the third quarter of 2022.

With an inflated P/E ratio, an elevated P/B ratio, and an irregular stream of positive cash flows with an upwards trend, we can conclude that DexCom is probably overvalued at current prices. The stock presents mixed growth indicators because of its consistently strong gross margins that are increasing, and an inflated PEG ratio. Thanks for dropping by! If you liked this article, please subscribe to our newsletter -- it's free and delivered daily!

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.