Standing out among the Street's worst performers today is Penumbra, a medical instruments & supplies company whose shares slumped -9.7% to a price of $269.46, 22.45% below its average analyst target price of $347.46.
The average analyst rating for the stock is buy. PEN underperformed the S&P 500 index by -9.0% during today's evening session, but outpaced it by 74.0% over the last year with a return of 84.0%.
Penumbra, Inc., together with its subsidiairies, designs, develops, manufactures, and markets medical devices in the United States and internationally. The company is part of the healthcare sector. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.
Penumbra's trailing 12 month P/E ratio is 1796.4, based on its trailing EPS of $0.15. The company has a forward P/E ratio of 102.5 according to its forward EPS of $2.63 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the health care sector has an average P/E ratio of 24.45, and the average for the S&P 500 is 15.97.
To better understand PEN’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
Penumbra’s PEG is 8.28, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Penumbra's gross profit margin trends:
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-23 | 847,133 | -311,926 | 63.18 | -0.64 |
| 2022-02-22 | 747,590 | -272,208 | 63.59 | 5.39 |
| 2021-02-23 | 560,412 | -222,237 | 60.34 | -11.2 |
| 2020-02-26 | 547,405 | -175,441 | 67.95 | n/a |
- Average gross margin: 63.8 %
- Average gross margin growth rate: -1.8 %
- Coefficient of variability (lower numbers indicating more stability): 4.9 %
We can see from the above that Penumbra business is not strong and its stock is likely not suitable for conservative investors.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Penumbra was $-36363000 as of its last 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 PEN's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $8.65 Million and they've been growing at an average rate of -26.0%.
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. Penumbra's P/B ratio is 9.68 -- in other words, the market value of the company exceeds its book value by a factor of more than 9, 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 an inflated P/E ratio, an elevated P/B ratio, and irregular cash flows with a downwards trend, Penumbra is likely overvalued at today's prices. The company has poor growth indicators because of an inflated PEG ratio and weak operating margins with a negative growth trend. We hope you enjoyed this overview of PEN's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
