Medical Specialities company Natera is taking Wall Street by surprise today, falling to $43.94 and marking a -3.0% change compared to the S&P 500, which moved 0.0%. NTRA is -40.73% below its average analyst target price of $74.14, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Natera has underperfomed the S&P 500 by -21.0%, moving 0.0%.
Natera, Inc., a diagnostics company, develops and commercializes molecular testing services 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.
Natera 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 $-2.74 and $-4.86. We can see that NTRA has a forward P/E ratio of -16.0 and a trailing P/E ratio of -9.0. 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 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, Natera's operating margins have averaged -57.8% and displayed a mean growth rate of -0.5%. 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 Natera's free cash flow, which was $-383804000 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 NTRA's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $-175503333.3 and they've been growing at an average rate of -0.0%.
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). Natera's P/B ratio is 8.41 -- in other words, the market value of the company exceeds its book value by a factor of more than 8, 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.
Natera is likely overvalued at today's prices because it has a negative P/E ratio, an elevated P/B ratio, and an unconvincing cash flow history with a flat trend. The stock has poor growth indicators 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 NTRA's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
