Here’s Why Vertex Pharmaceuticals Stock Is Undervalued At $215 Levels

by Trefis Team
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We believe that the stock price of Vertex Pharmaceuticals (VRTX) is undervalued at current levels of $215. VRTX stock is up a mere 6% off the March 2020 bottom compared to the S&P which moved 85%. VRTX stock has significantly underperformed the broader markets due to multiple factors. Firstly, in mid-October 2020, the company discontinued VX-814, a drug that was being investigated for a potential treatment for alpha-1 antitrypsin deficiency (AATD). This development caused a large 20% hit to the stock in a single trading session. Secondly, the company’s Q4 results were lower than street expectations, weighing on the stock price growth. However, now that the stock has corrected (down 13% in the last one year) despite revenue growing 49% y-o-y over the last four quarters, we believe VRTX stock is likely to see higher levels. Our dashboard Buy Or Fear Vertex Pharmaceuticals Stock provides the key numbers behind our thinking.

Looking at a wider time horizon, VRTX stock is up 29% from the levels of $166 seen toward the end of 2018. Most of the stock price appreciation since 2018 can be attributed to the company’s EPS growth. Diving into fundamentals, total revenues grew 2x from $3.0 billion in 2018 to $6.2 billion in 2020, primarily due to strong sales for Trikafta, which was approved by the U.S. FDA in late 2019 and it alone garnered $3.9 billion in its first full-year of sales in 2020. The company’s net margins on a GAAP basis have been volatile rising from 11% in 2017 to 69% in 2018, and dropping to 44% in 2020. The surge in 2018 can be attributed to a tax benefit of over $1.5 billion from release of the company’s valuation allowance. This clubbed with a 2% growth in total shares outstanding due to share issuance has meant that the company’s earnings grew 27% from $8.24 in 2018 to $10.44 in 2020 on a per share basis.

Despite the strong fundamentals, the company’s P/E multiple didn’t see much growth, rising from 20x in 2018 to 23x in 2020. The P/E multiple is currently back at 20x, which we believe is low and compares with levels of 23x seen as recently as late 2020.

Outlook

2020 has been a solid year for Vertex’s revenue growth, courtesy of Trikafta. Vertex’s current commercial drugs primarily deal with Cystic Fibrosis (CF), a genetic disease that affects the lungs and digestive system. While Trifkafta is expected to be the single biggest revenue driver for the next few years, investors are also concerned about the company’s future outside of CF. The company’s management has also stated that they are looking to acquire more assets to bolster its pipeline, something that may interest investors when any deal is announced.

For now, all eyes will be on the expansion of Trikafta. The company reported a solid 29% jump in its adjusted revenues in Q4 2020, led by growth in Trikafta. Furthermore, the company’s adjusted net income margin grew over 500 bps to 41% in Q4 2020, compared to 35% in the prior year quarter. While the earnings were bolstered by margin expansion, partly due to lower R&D expenses, the overall earnings growth was below the street expectations.

Looking forward, Vertex will likely see an increase in demand for its CF drugs, given the market is large, and it is expected to grow in high-teens on an average over the next few years. While the Covid-19 related lockdowns had earlier impacted expansion of several drugs in 2020, due to a delay in new patient enrollments, the trend has largely reversed over the recent months. Now that one-third of the U.S. population has already received at least one dose of the Covid-19 vaccine, the U.S. in particular is fast approaching toward normalcy. That said, any further recovery in the economy and its timing hinge on the broader containment of the coronavirus spread. We are now seeing a large spike in Covid-19 cases in some of the countries, such as India and Brazil, owing to the new variants of the virus. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia.

Finally, looking at the valuation, we believe that VRTX stock is undervalued at the current levels of $215. Currently, investors seem to be worried about the pipeline and revenue dependency only on CF drugs. However, going by the numbers, Vertex’s revenues are estimated to grow 12% in 2021 as well as 2022, while EPS on an adjusted basis is expected to grow to $13.10 in 2022, compared to $10.32 in 2020. At the current price of $215, VRTX stock is trading at 19x its 2021 and 16x its 2022 earnings, compared to levels of 23x seen as recently as late 2020, implying that VRTX stock is undervalued currently.

While VRTX stock could see upside, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Masimo vs. Vertex Pharmaceuticals.

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