One of Wall Street's biggest winners of the day is Globus Medical, a medical instruments & supplies company whose shares have climbed 3.2% to a price of $51.59 -- 22.68% below its average analyst target price of $66.73.
The average analyst rating for the stock is hold. GMED may have outstripped the S&P 500 index by 3.0% so far today, but it has lagged behind the index by 30.0% over the last year, returning -15.0%.
Globus Medical, Inc., a medical device company, develops and commercializes healthcare solutions for patients with musculoskeletal disorders 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.
Globus Medical's trailing 12 month P/E ratio is 25.3, based on its trailing EPS of $2.04. The company has a forward P/E ratio of 19.8 according to its forward EPS of $2.6 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the health care sector has an average P/E ratio of 24.45, and the average for the S&P 500 is 15.97.
We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.
Globus Medical's PEG ratio of 1.72 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.
To better understand the strength of Globus Medical's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-21 | 1,022,843 | -522,867 | 23 | 15.0 |
| 2022-02-17 | 958,102 | -524,021 | 20 | 33.33 |
| 2021-02-17 | 789,042 | -456,107 | 15 | -34.78 |
| 2020-03-02 | 785,368 | -428,639 | 23 | -8.0 |
| 2019-02-21 | 712,969 | -376,675 | 25 | -3.85 |
| 2018-02-22 | 635,977 | -319,405 | 26 |
- Average operating margins: 22.0 %
- Average operating margins growth rate: -2.0 %
- Coefficient of variability (lower numbers indicate less volatility): 18.2 %
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 Globus Medical'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 (%) |
|---|---|---|---|---|
| 2023-02-21 | 178,468 | -74,047 | 252,515 | -24.21 |
| 2022-02-17 | 276,274 | -56,898 | 333,172 | 26.95 |
| 2021-02-17 | 198,793 | -63,658 | 262,451 | 8.13 |
| 2020-03-02 | 171,975 | -70,750 | 242,725 | 2.7 |
| 2019-02-21 | 181,643 | -54,697 | 236,340 | 12.1 |
| 2018-02-22 | 159,535 | -51,303 | 210,838 |
- Average free cash flow: $256.34 Million
- Average free cash flown growth rate: 0.0 %
- Coefficient of variability (the lower the better): 969985951.2 %
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, GMED 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.
Globus Medical has a P/B ratio of 2.61. This indicates that the market value of the company exceeds its book value by a factor of more than 2, 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.
Globus Medical is by most measures overvalued because it has an average P/E ratio, a lower P/B ratio than its sector average, and irregular cash flows with a flat trend. The stock has strong growth indicators because it has a an inflated PEG ratio and strong margins with a stable trend. We hope you enjoyed this overview of GMED's fundamentals.
