One of Wall Street's biggest winners of the day is Bausch + Lomb, a ophthalmic goods company whose shares have climbed 5.2% to a price of $20.18 -- 28.89% below its average analyst target price of $28.38.
The average analyst rating for the stock is buy. BLCO outperformed the S&P 500 index by 4.0% during today's afternoon session, and by 600.0% over the last year with a return of 2093.3%.
Bausch + Lomb Corporation operates as an eye health company 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.
Bausch + Lomb does not release its trailing 12 month P/E ratio since its earnings per share of $-0.3 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for BLCO of -67.3. Based on the company's positive earnings guidance of $1.28, the stock has a forward P/E ratio of 15.8.
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.
BLCO’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Bausch + Lomb, we obtain a PEG ratio of 2.09, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To gauge the health of Bausch + Lomb's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof.
BLCO's average gross profit margins over the last four years are 62.0%, which indicate it has a potential competitive advantage in its market. These margins are declining based on their four year average gross profit growth rate of -2.1%.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Bausch + Lomb's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 345,000 | -175,000 | 170,000 | -74.4 |
| 2021-12-31 | 873,000 | -209,000 | 664,000 | 152.47 |
| 2020-12-31 | 522,000 | -259,000 | 263,000 | -57.51 |
| 2019-12-31 | 799,000 | -180,000 | 619,000 | n/a |
- Average free cash flow: $429.0 Million
- Average free cash flown growth rate: -27.6 %
- Coefficient of variability (the lower the better): 58.0 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, BLCO is in a position to do either -- which can encourage more investors to place their capital in the company.
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.
Bausch + Lomb has a P/B ratio of 1.01. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Health Care sector, which stood at 4.16 as of the first quarter of 2023.
With a negative P/E ratio, a lower P/B ratio than its sector average, and generally positive cash flows with a downwards trend, we can conclude that Bausch + Lomb is probably overvalued at current prices. The stock presents poor growth indicators because of its weak operating margings with a negative growth trend, and a negative PEG ratio.
