The stock of Intercept Pharmaceuticals (NAS:ICPT, 30-year Financials) appears to be 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 $19.17 per share and the market cap of $635.7 million, Intercept Pharmaceuticals stock is estimated to be possible value trap. GF Value for Intercept Pharmaceuticals is shown in the chart below.
The reason we think that Intercept Pharmaceuticals 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, Intercept Pharmaceuticals has an Altman Z-score of -5.25, 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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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Intercept Pharmaceuticals has a cash-to-debt ratio of 0.82, which ranks worse than 85% of the companies in Biotechnology industry. Based on this, GuruFocus ranks Intercept Pharmaceuticals's financial strength as 1 out of 10, suggesting poor balance sheet. This is the debt and cash of Intercept Pharmaceuticals 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. Intercept Pharmaceuticals has been profitable 0 over the past 10 years. Over the past twelve months, the company had a revenue of $312.7 million and loss of $8.37 a share. Its operating margin is -69.27%, which ranks in the middle range of the companies in Biotechnology industry. Overall, the profitability of Intercept Pharmaceuticals is ranked 2 out of 10, which indicates poor profitability. This is the revenue and net income of Intercept Pharmaceuticals over the past years:
Growth is probably one of the most important factors 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. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Intercept Pharmaceuticals's 3-year average revenue growth rate is better than 75% of the companies in Biotechnology industry. Intercept Pharmaceuticals's 3-year average EBITDA growth rate is 19.6%, which ranks in the middle range of the companies in Biotechnology industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Intercept Pharmaceuticals's return on invested capital is -313.94, and its cost of capital is 10.01. The historical ROIC vs WACC comparison of Intercept Pharmaceuticals is shown below:
In closing, the stock of Intercept Pharmaceuticals (NAS:ICPT, 30-year Financials) shows every sign of being possible value trap. The company's financial condition is poor and its profitability is poor. Its growth ranks in the middle range of the companies in Biotechnology industry. To learn more about Intercept Pharmaceuticals stock, you can check out its 30-year Financials here.
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