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

Penumbra (PEN) stock climbed 4.1 % this afternoon. According to our metrics, the company seems overvalued at today's prices. In the below analysis, we will put Penumbra's valuation in the context of its poor growth indicators and positive market sentiment, which are also strong drivers for share price.

Penumbra, Inc., together with its subsidiairies, designs, develops, manufactures, and markets medical devices in the United States and internationally. The mid-cap Health Care company is based in Alameda, United States and has 3,900 full time employees.

PEN Has a Higher P/E Ratio Than the Sector Average

Compared to the Health Care sector's average of 24.45, Penumbra has a trailing twelve month price to earnings (P/E) ratio of -4883.3 and an expected P/E ratio of 129.6. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $-0.06 or forward earnings per share of $2.26.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Penumbra's P/E ratio is higher than its sector average of 24.45, we can deduce that the market is overvaluing the company's earnings.

Penumbra Is Overvalued in Terms of Expected Growth

Penumbra's PEG ratio is 9.98. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Penumbra's case, it tells us the company is overvalued.

PEN Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Penumbra's P/B ratio of 11.2 is higher than its sector average of 4.16, such a margin of safety does not exist for the stock.

PEN's Weak Cash Flow Generation Is Troubling

The table below shows that Penumbra is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in Penumbra's case, free cash flow is growing at an average rate of -16.5% with a coefficient of variability of 107.3%. We can also see that cash flows from operations are evolving at a -20.3% rate, versus -3.3%:

Penumbra's Is a Profitable Business

If you are looking to make PEN a long term investment, it's essential that you understand the viability of its business through a study of its margins. Gross margins tell you how much the company makes in profit when only the costs directly related to producing the goods or delivering the service are taken into account. Operating margins, on the other hand, factor in overhead costs so they tell you how effectively Penumbra is run.

Penumbra's Gross Margins

Penumbra's Operating Margins

Penumbra's cost of revenue is growing at a rate of 15.5% in contrast to 13.0% for operating expenses. Sales revenues, on the other hand, have experienced a 11.5% growth rate. As a result, the average gross margins growth is -1.8 and the average operating margins growth rate is -46.3, with coefficients of variability of 4.9% and 1778.1% respectively.

Penumbra Benefits From Positive Market Signals

The market sentiment regarding Penumbra is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $325.0 to $285.0. PEN is trading -2.52% away from its target price of $300.56. 14.6% of the company's shares are tied to short positions, and 91.3% of the shares are held by institutional investors.