As of August 29, 2023, DexCom (DXCM, Financial) experienced a daily loss of 1.2%, and a 3-month loss of 14.48%. The Earnings Per Share (EPS) stands at 0.86. The question that arises is, is DexCom significantly undervalued? This article will delve into a comprehensive valuation analysis to answer this question. Read on for an insightful journey into the intrinsic value of DexCom.
Company Introduction
DexCom Inc (DXCM, Financial) specializes in designing and commercializing continuous glucose monitoring systems for diabetic patients. These systems serve as an alternative to the traditional blood glucose meter process. The company is also evolving its systems to provide integration with insulin pumps from Insulet and Tandem. The current stock price stands at $98.1, while its GF Value, an estimation of its fair value, is $142.1. This discrepancy paves the way for a deeper exploration of the company's value.
Understanding the GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. This measure is derived from three key factors: historical multiples that the stock has traded at, a GuruFocus adjustment factor based on the company's past performance and growth, and future estimates of the business performance. The GF Value Line gives an overview of the fair value that the stock should ideally be traded at. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
The stock of DexCom (DXCM, Financial) is estimated to be significantly undervalued based on GuruFocus' valuation method. At its current price of $98.1 per share, DexCom has a market cap of $38.10 billion. As DexCom is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
Link: These companies may deliver higher future returns at reduced risk.
Financial Strength
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. DexCom has a cash-to-debt ratio of 1.08, which is worse than 64.66% of 829 companies in the Medical Devices & Instruments industry. GuruFocus ranks the overall financial strength of DexCom at 7 out of 10, which indicates that the financial strength of DexCom is fair.
Profitability and Growth
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. DexCom has been profitable 4 over the past 10 years. Over the past twelve months, the company had a revenue of $3.20 billion and Earnings Per Share (EPS) of $0.86. Its operating margin is 14.02%, which ranks better than 72.85% of 825 companies in the Medical Devices & Instruments industry. Overall, GuruFocus ranks the profitability of DexCom at 4 out of 10, which indicates poor profitability.
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. DexCom's 3-year average revenue growth rate is better than 75.38% of 723 companies in the Medical Devices & Instruments industry. DexCom's 3-year average EBITDA growth rate is 31.8%, which ranks better than 77.2% of 728 companies in the Medical Devices & Instruments industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, DexCom's ROIC was 14.14, while its WACC came in at 10.94.
Conclusion
In short, the stock of DexCom (DXCM, Financial) is estimated to be significantly undervalued. The company's financial condition is fair and its profitability is poor. Its growth ranks better than 77.2% of 728 companies in the Medical Devices & Instruments industry. To learn more about DexCom stock, you can check out its 30-Year Financials here.
To find out the high quality companies that may deliver above average returns, please check out GuruFocus High Quality Low Capex Screener.
