Has Celgene Become the Perfect Stock?
Apr 16th 2012 10:01AM
Updated Apr 16th 2012 4:02PM
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Celgene (NAS: CELG) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Celgene.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||40.0%||Pass|
|1-Year Revenue Growth > 12%||33.5%||Pass|
|Margins||Gross Margin > 35%||90.1%||Pass|
|Net Margin > 15%||27.2%||Pass|
|Balance Sheet||Debt to Equity < 50%||33.0%||Pass|
|Current Ratio > 1.3||2.83||Pass|
|Opportunities||Return on Equity > 15%||22.9%||Pass|
|Valuation||Normalized P/E < 20||39.04||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Celgene last year, the company has kept the same seven-point score. The company has kept a healthy growth rate and boosted its returns on equity, but its valuation remains high, and it still doesn't pay a dividend.
Celgene stands out within the biotech industry for having a number of approved therapies and drugs that doctors use to fight cancer and immune-related diseases. Its Revlimid cancer treatment made up almost two-thirds of its revenue in 2011, although sales of the tumor-targeting drug Abraxane, which Celgene acquired in its buyout of Abraxis in late 2010, have ramped up quickly.
Another advantage that Celgene has among health-care stocks is patent protection. Pfizer (NYS: PFE) , Merck (NYS: MRK) , and several other Big Pharma peers have some of their best known drugs either already off-patent or losing protection in the near future. By contrast, Revlimid is protected in the U.S. until 2027, and Abraxane has until 2024. As a result, Celgene doesn't have to make the sweeping changes that Pfizer and Merck are considering to bolster their pipelines.
For Celgene to pick up those final few points, the obvious answer is to initiate a dividend. Amgen (NAS: AMGN) recently did so, although fellow big biotech Gilead Sciences (NAS: GILD) has avoided the move in favor of giving itself cash for potential acquisitions. Depending on how Celgene wants to go forward, some combination of dividends and cash retention might be the right balance to make shareholders happy while also maintaining flexibility to make strategic acquisitions in the future.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Pfizer and Gilead Sciences. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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