OPCH Rockets Upwards. But Is There Reason to Worry?

Shares of Option Care Health (OPCH) jumped 1.6 % during today's afternoon session, bringing their 52 week performance to 5.4%. The stock seems to be overvalued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account the company's strong growth indicators and mixed market sentiment.

Option Care Health, Inc. offers home and alternate site infusion services in the United States. The mid-cap Health Care company is based in Bannockburn, United States and has 5,597 full time employees.

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

Compared to the Health Care sector's average of 24.45, Option Care Health has a trailing twelve month price to earnings (P/E) ratio of 34.9 and an expected P/E ratio of 26.9. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $0.87 or forward earnings per share of $1.13.

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 Option Care Health'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.

Option Care Health Is Overvalued in Terms of Expected Growth

Option Care Health's PEG ratio is 3.18. 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 Option Care Health's case, it tells us the company is overvalued.

OPCH Has an Average P/B Ratio

Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.

Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For Option Care Health, the P/B value is 4.04 while the average for the Health Care sector is 4.16.

Investors Stand to Gain from OPCH's Cash Flows

Option Care Health has strong cash flows. With a coefficient of variability of 73.6% and an average growth rate of 113.5%, the company is effectively turning its revenue into cash. We calculate Option Care Health's free cash flows by subtracting capital expenditures (long term investments in the business) from its total cash flows from operations. The table below shows us that capital expenditures are evolving at a 5.7% rate, versus 61.4% for operating expenses:

Option Care Health's Is a Profitable Business

If you are looking to make OPCH 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 Option Care Health is run.

Option Care Health's Gross Margins

Option Care Health's Operating Margins

Option Care Health's cost of revenue is growing at a rate of 14.4% in contrast to 5.1% for operating expenses. Sales revenues, on the other hand, have experienced a 14.3% growth rate. As a result, the average gross margins growth is -0.2 and the average operating margins growth rate is 397.0, with coefficients of variability of 1.4% and 72.2% respectively.

Option Care Health Benefits From Positive Market Signals

The market sentiment regarding Option Care Health is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $39.0 to $32.5. OPCH is trading -16.39% away from its target price of $36.3. 5.9% of the company's shares are tied to short positions, and 85.8% of the shares are held by institutional investors.