Pharmaceutical company Grifols is standing out today, surging to $8.79 and marking a 14.7% change. In comparison the S&P 500 moved only -1.0%. GRFS is -24.7% below its average analyst target price of $11.68, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Grifols has underperfomed the S&P 500 by 49.6%, moving -21.2%.
Grifols, S.A. operates as a plasma therapeutic company in Spain, the United States, Canada, 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.
Grifols's trailing 12 month P/E ratio is 32.6, based on its trailing EPS of $0.27. The company has a forward P/E ratio of 7.3 according to its forward EPS of $1.2 -- which is an estimate of what its earnings will look like in the next quarter.
As of the second quarter of 2024, the average Price to Earnings (P/E) ratio for US health care companies is 27.61, and the S&P 500 has an average of 28.21. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
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 Grifols's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.13. 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 GRFS's growth potential .
To better understand the strength of Grifols's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.
GRFS's average gross profit margins over the last four years are 41.5%, which indicate it has a potential competitive advantage in its market. These margins are declining based on their four year average gross profit growth rate of -3.7%.
Grifols'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 | 208,283 | 548,891 | -340,608 | 38.47 |
| 2022 | -10,867 | 542,718 | -553,585 | -528.2 |
| 2021 | 596,975 | 467,694 | 129,281 | -80.29 |
| 2020 | 1,110,336 | 454,369 | 655,967 | 208.22 |
| 2019 | 568,933 | 1,175,072 | -606,139 | -244.06 |
| 2018 | 737,428 | 316,677 | 420,751 |
- Average free cash flow: $-49055500.0
- Average free cash flown growth rate: -29.7 %
- Coefficient of variability (lower numbers indicating more stability): 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 GRFS, 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.
Grifols has a P/B ratio of 1.07. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Health Care sector, which stood at 3.69 as of the second quarter of 2024.
Grifols is by most measures overvalued because it has an average P/E ratio, a lower P/B ratio than its sector average, and negative cash flows with a downwards trend. The stock has poor growth indicators because it has a an inflated PEG ratio and weak operating margins with a negative growth trend. We hope you enjoyed this overview of GRFS's fundamentals.
