Shares of Viatris Underperform the Market. What Do the Numbers Tell Us?

Medicinal Chemicals company Viatris is taking Wall Street by surprise today, falling to $10.12 and marking a -4.7% change compared to the S&P 500, which moved -1.0%. VTRS is -29.77% below its average analyst target price of $14.41, which implies there is more upside for the stock. However, the average analyst rating for the stock is hold -- a more pessimistic outlook than you might expect. Over the last year, Viatris has underperfomed the S&P 500 by -8.0%, moving 6.0%.

Viatris Inc. operates as a healthcare company worldwide. 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.

Viatris's trailing 12 month P/E ratio is 6.7, based on its trailing EPS of $1.51. The company has a forward P/E ratio of 3.5 according to its forward EPS of $2.87 -- which is an estimate of what its earnings will look like in the next quarter. 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.

One limitation P/E ratios is that they don't tell us to what extent future growth expectations are priced into Viatris 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 Viatris's P/E ratio by its projected 5 year earnings growth rate gives us its Price to Earnings Growth (PEG) ratio of -1.73. 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 a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. 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. After looking at its annual reports, we obtained the following information on VTRS's margins:

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2023-02-27 16,262,700 -9,765,700 40 29.03
2022-02-28 17,886,300 -12,310,800 31 -3.12
2021-02-08 11,946,000 -8,149,300 32
  • Average gross margin: 34.3 %
  • Average gross margin growth rate: -0.0 %
  • Coefficient of variability (higher numbers indicating more instability): 14.4 %

We can see from the above that Viatris 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 Viatris was $1.39 Billion as of its last annual report. The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. The company's average cash flow over the last 4 years has been $2.07 Billion and they've been growing at an average rate of 0.0%. VTRS's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 4.5% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.

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). Viatris's P/B ratio of 0.58 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Health Care sector was 4.16 as of the first quarter of 2023.

Viatris is likely fairly valued at today's prices because it has a very low P/E ratio, an exceptionally low P/B ratio, and irregular cash flows with a flat trend. The stock has mixed growth prospects because of its weak operating margins with a positive growth rate, and a PEG ratio of less than 1. We hope this preliminary analysis will encourage you to do your own research into VTRS's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.

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.