The stock of Galapagos NV (NAS:GLPG, 30-year Financials) shows every sign 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 $68.86 per share and the market cap of $4.5 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 1.66, 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. Galapagos NV has a cash-to-debt ratio of 178.52, which ranks better than 76% of the companies in Biotechnology industry. Based on this, GuruFocus ranks Galapagos NV’s financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of Galapagos NV over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one 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 $583.3 million and loss of $4.369 a share. Its operating margin is -37.44%, which ranks better than 66% of the companies in Biotechnology industry. Overall, GuruFocus ranks the profitability of Galapagos NV at 3 out of 10, which indicates poor profitability. This is the revenue and net income of Galapagos NV over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Galapagos NV is 41.9%, which ranks better than 84% of the companies in Biotechnology industry. The 3-year average EBITDA growth is -24.8%, which ranks worse than 83% 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 -25.85 while its WACC came in at 3.58. The historical ROIC vs WACC comparison of Galapagos NV is shown below:
To conclude, Galapagos NV (NAS:GLPG, 30-year Financials) stock is believed to be possible value trap. The company's financial condition is fair and its profitability is poor. Its growth ranks worse than 83% 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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