The stock of Galapagos NV (NAS:GLPG, 30-year Financials) gives every indication of being possible value trap, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $83.34 per share and the market cap of $5.5 billion, Galapagos NV stock appears to be possible value trap. GF Value for Galapagos NV is shown in the chart below.
The reason we think that Galapagos NV stock might be a value trap is because its Piotroski F-score is only 2, out of the total of 9. Such a low Piotroski F-score indicates the company is getting worse in multiple aspects in the areas of profitability, funding and efficiency. In this case, investors should look beyond the low valuation of the company and make sure it has no long-term risks. To learn more about how the Piotroski F-score measures the business trend of a company, please go here. Furthermore, Galapagos NV has an Altman Z-score of 1.71, which indicates that the financial condition of the company is in the distressed zone and implies a higher risk of bankruptcy. An Altman Z-score of above 2.99 would be better, indicating safe financial conditions. To learn more about how the Z-score measures the financial risk of the company, please go here.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Galapagos NV has a cash-to-debt ratio of 175.35, which which ranks better than 77% of the companies in Biotechnology industry. The overall financial strength of Galapagos NV is 6 out of 10, which indicates that the financial strength of Galapagos NV is fair. This is the debt and cash of Galapagos NV over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Galapagos NV has been profitable 3 over the past 10 years. Over the past twelve months, the company had a revenue of $556.2 million and loss of $5.398 a share. Its operating margin is -37.37%, which ranks better than 66% of the companies in Biotechnology industry. Overall, the profitability of Galapagos NV is ranked 3 out of 10, which indicates poor profitability. This is the revenue and net income of Galapagos NV over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Galapagos NV is 41.9%, which ranks better than 84% of the companies in Biotechnology industry. The 3-year average EBITDA growth rate is -24.8%, which ranks worse than 82% of the companies in Biotechnology industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Galapagos NV's ROIC is -25.83 while its WACC came in at 2.86. The historical ROIC vs WACC comparison of Galapagos NV is shown below:
Overall, Galapagos NV (NAS:GLPG, 30-year Financials) stock gives every indication of being possible value trap. The company's financial condition is fair and its profitability is poor. Its growth ranks worse than 82% of the companies in Biotechnology industry. To learn more about Galapagos NV stock, you can check out its 30-year Financials here.
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