The Market Is Betting Big on HZNP - What's the Catch?

Drug Manufacturing company Horizon Therapeutics Public is standing out today, surging to $99.73 and marking a 26.6% change. In comparison the S&P 500 moved only -0.0%. HZNP is -5.99% below its average analyst target price of $106.09, which implies there is more upside for the stock. As such, the average analyst rates it at buy. Over the last year, Horizon Therapeutics Public has underperfomed the S&P 500 by 13.0%, moving -25.3%.

Horizon Therapeutics Public Limited Company, a biotechnology company, focuses on the discovery, development, and commercialization of medicines that address critical needs for people impacted by rare, autoimmune, and severe inflammatory diseases. The company is part of the healthcare sector. 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.

Horizon Therapeutics Public's trailing 12 month P/E ratio is 41.2, based on its trailing Eps of $2.42. The company has a forward P/E ratio of 19.1 according to its forward Eps of $5.22 -- 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.

We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.

Horizon Therapeutics Public's PEG ratio of 1.39 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.

To better understand the strength of Horizon Therapeutics Public's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

Date Reported Total Revenue ($) Operating Expenses ($) Operating Margins (%) YoY Growth (%)
2021-12-31 3,226,410,000.0 2,612,178,000.0 19.04 -20.96
2020-12-31 2,200,429,000.0 1,670,286,000.0 24.09 125.77
2019-12-31 1,300,029,000.0 1,161,366,000.0 10.67 100.94
2018-12-31 1,207,570,000.0 1,143,486,000.0 5.31 n/a
  • Average operating margins: 14.8 %
  • Average operating margins growth rate: 68.6 %
  • Coefficient of variability (lower numbers indicate less volatility): 56.8 %

Horizon Therapeutics Public's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

Date Reported Cash Flow from Operations ($) Capital expenditures ($) Free Cash Flow ($) YoY Growth (%)
2021-12-31 1,035,271,000.0 -76,596,000.0 958,675,000.0 148.47
2020-12-31 555,688,000.0 -169,852,000.0 385,836,000.0 -5.54
2019-12-31 426,332,000.0 -17,857,000.0 408,475,000.0 115.25
2018-12-31 194,543,000.0 -4,771,000.0 189,772,000.0 n/a
  • Average free cash flow: $485,689,500.00
  • Average free cash flown growth rate: 86.1 %
  • Coefficient of variability (lower numbers indicating more stability): 68.0 %

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, HZNP is in a position to do either -- which can encourage more investors to place their capital in the company.

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.

Horizon Therapeutics Public's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 4, 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.

Horizon Therapeutics Public is by most measures fairly valued 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 mixed growth indicators because it has a an average PEG ratio and inconsistent operating margins with a positive growth rate. We hope you enjoyed this overview of HZNP's fundamentals.

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.