Standing out among the Street's worst performers today is Lantheus, a biotechnology company whose shares slumped -3.0% to a price of $86.09, 29.65% below its average analyst target price of $122.38.
The average analyst rating for the stock is buy. LNTH underperformed the S&P 500 index by -3.0% during today's afternoon session, but outpaced it by 29.0% over the last year with a return of 39.0%.
Lantheus Holdings, Inc. develops, manufactures, and commercializes diagnostic and therapeutic products that assist clinicians in the diagnosis and treatment of heart, cancer, and other diseases worldwide. 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.
Lantheus does not release its trailing 12 month P/E ratio since its earnings per share of $-0.27 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for LNTH of -318.9. Based on the company's positive earnings guidance of $6.14, the stock has a forward P/E ratio of 14.0. 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 first quarter of 2023, the health care sector has an average P/E ratio of 24.45, and the average for the S&P 500 is 15.97.
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 Lantheus'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 0.42. 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, Lantheus's operating margins have averaged -0.1% and displayed a mean growth rate of -28.6%. 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 Lantheus's free cash flow, which was $263.43 Million 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 LNTH's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $91.86 Million and they've been growing at an average rate of 45.8%.
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). Lantheus's P/B ratio is 13.2 -- 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.
Lantheus is likely overvalued at today's prices because it has a negative P/E ratio, an elevated P/B ratio, and an unconvincing cash flow history with an upwards trend. The stock has poor growth indicators because of its consistently negative margins with a negative growth trend, and a negative PEG ratio. We hope this preliminary analysis will encourage you to do your own research into LNTH's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
