DexCom (DXCM) Shares Climb 6.5% Today

Medical Instruments & Supplies company DexCom is standing out today, surging to $106.88 and marking a 6.5% change. In comparison the S&P 500 moved only -1.0%. DXCM is -28.45% below its average analyst target price of $149.37, which implies there is more upside for the stock.

As such, the average analyst rates it at buy. Over the last year, DexCom shares have outperformed the S&P 500 by 7.0%, with a price change of 21.0%.

DexCom, Inc., a medical device company, focuses on the design, development, and commercialization of continuous glucose monitoring (CGM) systems in the United States and internationally. 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.

DexCom's trailing 12 month P/E ratio is 122.9, based on its trailing EPS of $0.87. The company has a forward P/E ratio of 66.4 according to its forward EPS of $1.61 -- 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.

DXCM’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 DexCom, we obtain a PEG ratio of 2.24, 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 better understand the strength of DexCom's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.

DXCM's average gross profit margins over the last four years are 65.8%, 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 -0.1%.

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 DexCom'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 Cash Flow ($ k) YoY Growth (%)
2023-02-09 669,500 -364,800 1,034,300 24.36
2022-02-14 442,500 -389,200 831,700 23.29
2021-02-11 475,600 -199,000 674,600 36.42
2020-02-13 314,500 -180,000 494,500 159.85
2019-02-21 123,200 -67,100 190,300 20.44
2018-02-27 92,000 -66,000 158,000
  • Average free cash flow: $563.9 Million
  • Average free cash flown growth rate: 0.0 %
  • Coefficient of variability (the lower the better): 795599608.4 %

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, DXCM is in a position to do either -- which can encourage more investors to place their capital in the company.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by 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.

DexCom's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 19, 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.

With an inflated P/E ratio, an elevated P/B ratio, and a pattern of improving cash flows with a flat trend, we can conclude that DexCom is probably overvalued at current prices. The stock presents mixed growth prospects because of its weak operating margins with a positive growth rate, and an inflated PEG ratio.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.