Biotechnology company Seagen is taking Wall Street by surprise today, falling to $190.07 and marking a -4.8% change compared to the S&P 500, which moved -0.0%. SGEN is -14.63% below its average analyst target price of $222.64, which implies there is more upside for the stock. However, the average analyst rating for the stock is hold -- a more pessimistic outlook than you might expect. Over the last year, Seagen shares have outstripped the S&P 500 by 35.0%, with a price change of 36.2%.
Seagen Inc., a biotechnology company, develops and commercializes therapies for the treatment of cancer 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.
Seagen does not publish either its forward or trailing P/E ratios because their values are negative -- meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (EPS) values of $-0.78 and $-3.49. We can see that SGEN has a forward P/E ratio of -243.7 and a trailing P/E ratio of -54.5. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US health care companies is 24.45, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
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 Seagen'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 0.7. 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!
To understand the company's long term profitability and market position, we can analyze its operating margins, which are the ratio of its net profits to its revenues. Over the last four years, Seagen's operating margins have averaged -17.8% and displayed a mean growth rate of -6.7%. These numbers show that the company may not be on the best track.
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 Seagen's free cash flow, which was $-531091000.0 as of its most recent annual report. Free cash flow represents the amount of money available for reinvestment in the business or for payments to equity investors in the form of a dividend. In SGEN's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $-135689750.0 and they've been growing at an average rate of -22.7%.
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). Seagen's P/B ratio is 13.07 -- in other words, the market value of the company exceeds its book value by a factor of more than 13, so the company's assets may be overvalued compared to the average P/B ratio of the Health Care sector, which stands at 4.16 as of the first quarter of 2023.
Since it has a negative P/E ratio, an elevated P/B ratio, and an unconvincing cash flow history with a downwards trend, Seagen is likely overvalued at today's prices. The company has poor growth indicators because of a negative PEG ratio and consistently negative margins with a negative growth trend. We hope you enjoyed this overview of SGEN's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
