Shares of ICON Continue Upwards Trend as They Rise to $237.0.

One of Wall Street's biggest winners of the day is ICON, a biotechnology company whose shares have climbed 5.2% to a price of $237.0 -- 14.99% below its average analyst target price of $278.79.

The average analyst rating for the stock is buy. ICLR outperformed the S&P 500 index by 6.0% during today's afternoon session, and by 14.0% over the last year with a return of 24.0%.

ICON Public Limited Company, a clinical research organization, provides outsourced development and commercialization services in Ireland, rest of Europe, the United States, and internationally. 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.

ICON's trailing 12 month P/E ratio is 38.3, based on its trailing EPS of $6.18. The company has a forward P/E ratio of 16.3 according to its forward EPS of $14.58 -- 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.

ICON's PEG ratio of 1.29 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 gauge the health of ICON's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof.

ICLR's gross profit margins have averaged 11.7% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins are declining based on their four year average gross profit growth rate of -5.0%.

ICON's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2023 563,315 142,160 421,155 -38.69
2022 829,142 142,160 686,982 -6.58
2021 829,142 93,750 735,392 39.5
2020 568,035 40,885 527,150 44.76
2019 412,541 48,397 364,144 8.8
2018 383,082 48,397 334,685
  • Average free cash flow: $511.58 Million
  • Average free cash flown growth rate: 3.9 %
  • Coefficient of variability (lower numbers indicating more stability): 431.5 %

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, ICLR 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.

ICON has a P/B ratio of 2.18. 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.

With an inflated P/E ratio, a lower P/B ratio than its sector average, and irregular cash flows with a flat trend, we can conclude that ICON is probably overvalued at current prices. The stock presents mixed growth prospects because of its weak operating margins with a stable trend, 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.