Standing out among the Street's worst performers today is Exact Sciences, a medical specialities company whose shares slumped -3.3% to a price of $95.39, 7.14% below its average analyst target price of $102.73.
The average analyst rating for the stock is buy. EXAS underperformed the S&P 500 index by -3.0% during today's morning session.
Exact Sciences Corporation provides cancer screening and diagnostic test products in the United States and internationally. The company is part of the healthcare sector.
Exact Sciences 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 $-1.21 and $-2.94. We can see that EXAS has a forward P/E ratio of -78.8 and a trailing P/E ratio of -32.4.
As of the second 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.
One limitation P/E ratios is that they don't tell us to what extent future growth expectations are priced into Exact Sciences market valuation. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. On the other hand, it's possible for companies with high P/E ratios to be fairly valued in terms of their growth expectations.
Dividing Exact Sciences's P/E ratio by its projected 5 year earnings growth rate gives us its Price to Earnings Growth (PEG) ratio of -0.51. Since it's negative, either the company's current P/E ratio or its growth rate is negative -- neither of which is a good sign.
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, Exact Sciences's operating margins have averaged -34.8% and displayed a mean growth rate of -1.0%. 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 Exact Sciences's free cash flow, which was $-438021000.0 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 EXAS's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $-222676250.0 and they've been growing at an average rate of -11.2%.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Exact sciences's P/B ratio is 5.61 -- in other words, the market value of the company exceeds its book value by a factor of more than 5, 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.
Exact Sciences is likely overvalued at today's prices because it has a negative P/E ratio, an elevated P/B ratio, and negative and highly variable cash flows with a downwards trend. The stock has mixed growth prospects because of its negative and irregular operating margins with a stable trend, and a negative PEG ratio. We hope this preliminary analysis will encourage you to do your own research into EXAS's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.