Standing out among the Street's worst performers today is Vertex Pharmaceuticals, a pharmaceutical company whose shares slumped -11.8% to a price of $394.71, 23.4% below its average analyst target price of $515.27.
The average analyst rating for the stock is buy. VRTX lagged the S&P 500 index by -13.0% so far today and by -12.0% over the last year, returning 11.7%.
Vertex Pharmaceuticals Incorporated, a biotechnology company, engages in developing and commercializing therapies for treating cystic fibrosis (CF). 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.
Vertex Pharmaceuticals does not release its trailing 12 month P/E ratio since its earnings per share of $-1.88 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for VRTX of -210.0. Based on the company's positive earnings guidance of $18.77, the stock has a forward P/E ratio of 21.0. 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 third quarter of 2024, the health care sector has an average P/E ratio of 26.07, and the average for the S&P 500 is 29.3.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Vertex Pharmaceuticals was $3.34 Billion as of its last annual report. This 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 its strong cash flows, VRTX is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 20.1% and has on average been $2.56 Billion.
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). Vertex pharmaceuticals's P/B ratio is 6.51 -- in other words, the market value of the company exceeds its book value by a factor of more than 6, so the company's assets may be overvalued compared to the average P/B ratio of the Health Care sector, which stands at 3.53 as of the third quarter of 2024.
Since it has a negative P/E ratio., a higher than Average P/B Ratio, and generally positive cash flows with an upwards trend, Vertex Pharmaceuticals is likely undervalued at today's prices. The company has mixed growth prospects because of no PEG ratio and strong operating margins with a positive growth rate. We hope you enjoyed this overview of VRTX's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
