Pharmaceutical company Ionis Pharmaceuticals is standing out today, surging to $50.76 and marking a 6.1% change. In comparison the S&P 500 moved only 1.0%. IONS is -14.63% below its average analyst target price of $59.45, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, shares of Ionis Pharmaceuticals have offered a similar return to the S&P 500, moving 21.9%.
Ionis Pharmaceuticals, Inc. discovers and develops RNA-targeted therapeutics in the United States. 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.
Ionis Pharmaceuticals 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 $-3.18 and $-2.67. We can see that IONS has a forward P/E ratio of -16.0 and a trailing P/E ratio of -19.0.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the second quarter of 2024, the health care sector has an average P/E ratio of 27.61, and the average for the S&P 500 is 28.21.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide Ionis Pharmaceuticals's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of -0.34. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing IONS's growth potential .
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Ionis Pharmaceuticals's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | -307,513 | 23,805 | -331,318 | -14.21 |
| 2022 | -274,370 | 15,721 | -290,091 | -1639.43 |
| 2021 | 30,799 | 11,955 | 18,844 | 2340.93 |
| 2020 | 35,892 | 35,120 | 772 | -99.75 |
| 2019 | 345,627 | 30,905 | 314,722 | -46.59 |
| 2018 | 602,906 | 13,608 | 589,298 |
- Average free cash flow: $50.37 Million
- Average free cash flown growth rate: -21.5 %
- Coefficient of variability (the lower the better): 0.0 %
If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for IONS, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Ionis Pharmaceuticals's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 24, so the company's assets may be overvalued compared to the average P/B ratio of the Health Care sector, which stands at 3.69 as of the second quarter of 2024.
With a negative P/E ratio., a higher than Average P/B Ratio, and positive cash flows with a downwards trend, we can conclude that Ionis Pharmaceuticals is probably overvalued at current prices. The stock presents poor growth indicators because of its with a negative growth trend, and a negative PEG ratio.
