Most analysts love Halozyme Therapeutics, which has an average rating of buy. But there's reason to believe the stock may be overvalued at today's price of $36.45 per share. Let's look at the fundamentals ourselves and see if we reach a different conclusion than the analyst community.
The first step in determining whether a stock is overvalued is to check its price to book (P/B) ratio. This is perhaps the most basic measure of a company's valuation, which is its market value divided by its book value. Book value refers to the sum of all of the company's assets minus its liabilities -- you can also think of it as the company's liquidation value.
Traditionally, value investors would look for companies with a ratio of less than 1 (meaning that the market value was smaller than the company's book value), but such opportunities are very rare these days. So we tend to look for company's whose valuations are less than their sector and market average. The P/B ratio for Halozyme Therapeutics is 81.58, compared to its sector average of 4.16 and the S&P 500's average P/B of 2.95.
Modernly, the most common metric for valuing a company is its Price to Earnings (P/E) ratio. It's simply today's stock price of 36.45 divided by either its trailing or forward earnings, which for Halozyme Therapeutics are $1.53 and $3.69 respectively. Based on these values, the company's trailing P/E ratio is 23.82 and its forward P/E ratio is 9.88. By way of comparison, the average P/E ratio of the Health Care sector is 24.45 and the average P/E ratio of the S&P 500 is 15.97.
When we had up all the inflows and outflows of cash, including payments to creditors, we obtain Halozyme Therapeutics's levered free cash flow of $235 Million. This represents the money left over from the company's operations that is available for reinvestment in the business, or for paying out to equity investors in the form of a dividend. Despite its positive cash flows, Halozyme Therapeutics does not currently pay a dividend.
Despite the quantitative evidence that Halozyme Therapeutics is overvalued, analysts are mostly bullish on the stock. What do they know about the stock's that trumps its weak valuation and growth potential? We will look into this question in a future report focusing on qualitative factors that might be favoring HALO.
