As ALKS Rises, Is it Becoming Overvalued?

Alkermes (ALKS) stock climbed 4.0 % this morning. According to our metrics, the company seems fairly valued at today's prices. In the below analysis, we will put Alkermes's valuation in the context of its mixed growth prospects and mixed market sentiment, which are also strong drivers for share price.

Alkermes plc, a biopharmaceutical company, researches, develops, and commercializes pharmaceutical products to address unmet medical needs of patients in the fields of neuroscience and oncology in the United States, Ireland, and internationally. The mid-cap Health Care company is based in Dublin, Ireland and has 2,280 full time employees.

ALKS Has a Higher P/E Ratio Than the Sector Average

Compared to the Health Care sector's average of 24.45, Alkermes has a trailing twelve month price to earnings (P/E) ratio of 44.6 and an expected P/E ratio of 13.1. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $0.57 or forward earnings per share of $1.94.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Alkermes's P/E ratio is higher than its sector average of 24.45, we can deduce that the market is overvaluing the company's earnings.

Alkermes Is Fairly Valued in Terms of Expected Growth

Another factor pointing to Alkermes's value is its PEG ratio of 0.73. This is the stock's price to earnings ratio divided by its estimated earnings growth rate. If the resulting ratio is near or lower than 1 -- but higher than 0 -- its indicates that the company is faitly valued in terms of expected growth.

ALKS Has an Average P/B Ratio

Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.

Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For Alkermes, the P/B value is 3.3 while the average for the Health Care sector is 4.16.

ALKS's Weak Cash Flow Generation Is Troubling

The table below shows that Alkermes is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in Alkermes's case, free cash flow is growing at an average rate of 0.0% with a coefficient of variability of 276279194.7%. We can also see that cash flows from operations are evolving at a 0.0% rate, versus 0.0%:

Alkermes Is Not a Profitable Business

If you are looking to make ALKS a long term investment, its weak margins may give you cause for concern. As you can see from the below, the company is generally losing money on each sale it makes. That being said, stock prices in the short term can be independent of a company's margins, and Alkermes's management may be able to make the business profitable in the future.

Alkermes's Gross Margins

Alkermes's Operating Margins

Alkermes's cost of revenue is growing at a rate of -0.0% in contrast to -22.4% for operating expenses. Sales revenues, on the other hand, have experienced a 0.0% growth rate. As a result, the average gross margins growth is 0.1 and the average operating margins growth rate is 3.7, with coefficients of variability of 2.0% and 45.8% respectively.

Alkermes Benefits From Positive Market Signals

The market sentiment regarding Alkermes is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $49.0 to $30.0. ALKS is trading -29.02% away from its target price of $35.8. 6.0% of the company's shares are tied to short positions, and 102.5% of the shares are held by institutional investors.