Is Biogen's Stock Reasonable by the Numbers?

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Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples.
  • The consistency of past earnings and cash flow.
  • How much growth we can expect.

Let's see what those numbers can tell us about how expensive or cheap Biogen Idec (NAS: BIIB) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

Biogen has a P/E ratio of 24.0 and an EV/FCF ratio of 18.2 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Biogen has a P/E ratio of 31.7 and a five-year EV/FCF ratio of 23.9.

A positive one-year ratio under 10 for both metrics is ideal (at least in my opinion). For a five-year metric, under 20 is ideal.

Biogen is zero for four on hitting the ideal targets, but let's see how it compares against some competitors and industry mates. 

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

Biogen24.018.231.723.9
Bristol-Myers Squibb17.111.912.016.7
Pfizer14.68.716.412.1
Johnson & Johnson15.613.514.712.6

Source: S&P Capital IQ.

Numerically, we've seen how Biogen's valuation rates on both an absolute and relative basis. Next, let's examine...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, Biogen's net income margin has ranged from 18.3% to 23.8%. In that same time frame, unlevered free cash flow margin has ranged from 23.1% to 30.8%.

How do those figures compare with those of the company's peers? See for yourself:

anImage

Source: S&P Capital IQ; margin ranges are combined.

Additionally, over the last five years, Biogen has tallied up five years of positive earnings and five years of positive free cash flow.

Next, let's figure out...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you willoverpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, Biogen has put up past EPS growth rates of 59.8%. Meanwhile, Wall Street's analysts expect future growth rates of 11.1%.

Here's how Biogen compares to its peers for trailing five-year growth:

anImage

Source: S&P Capital IQ; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years:

anImage

Source: S&P Capital IQ; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us the price multiples shares of Biogen are trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 24.0 P/E ratio, and we see elevated price multiples all around, though its free cash flow multiples are lower than its earnings multiples.

However, for those premium prices, we see tremendous margins and past growth. Perhaps because of this combination of premium operational metrics and premium prices, our CAPS community rates Biogen a middling three stars out of five.

But all this is just a start. If you find Biogen Idec's numbers or story compelling, don't stop. Continue your due diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.

I wrote about a stock that's flying under the radar in our brand new free report: "The Stocks Only the Smartest Investors Are Buying." I invite you to take a free copy to find out the name of the company I believe Warren Buffett would be interested in if he could still invest in small companies.

At the time this article was published Anand Chokkaveluowns shares of Johnson & Johnson and Pfizer. The Motley Fool owns shares of Johnson & Johnson.Motley Fool newsletter serviceshave recommended buying shares of Pfizer and Johnson & Johnson.Motley Fool newsletter serviceshave recommended creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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