Does Santen Offer Opportunity After Its Strong 77.9% Rise Over Three Years?

Trying to decide whether to buy, hold, or sell Santen Pharmaceutical? You are definitely not alone. The stock has attracted attention thanks to some eye-catching moves: a modest 0.3% bump last week, 2.8% up over the last month, and a respectable 1.0% gain since the start of the year. What also stands out is the rollercoaster of recent years. While Santen’s share price soared an impressive 77.9% over the last three years, it is still trailing its five-year mark by 13.6%. Clearly, perceptions of risk and opportunity have shifted as the company’s business landscape has evolved.

Part of the reason for renewed investor interest is broader optimism surrounding the pharmaceutical sector as innovation continues and healthcare needs rise. More specifically, Santen’s strong presence in ophthalmology and a disciplined approach to new product launches have helped generate buzz, just as market watchers grow selective about quality and value.

So, how does Santen stack up from a pure valuation perspective? By the numbers, Santen checks four out of six boxes for being undervalued, earning a solid value score of 4. This suggests there may still be untapped upside in this stock. In the next section, we’ll break down exactly how those checks are calculated and what they mean for your portfolio, then dive into a smarter way to look at valuation that goes beyond the usual methods.

Why Santen Pharmaceutical is lagging behind its peers

Approach 1: Santen Pharmaceutical Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow (DCF) model estimates a company’s value by projecting its future free cash flows and discounting them back to today’s value using an appropriate rate. This approach aims to identify what the business is truly worth, regardless of current market swings.

For Santen Pharmaceutical, the DCF calculation uses its current Free Cash Flow (FCF), which stands at approximately ¥42.7 billion. Looking further out, analysts forecast that annual FCF will gradually rise, reaching roughly ¥46.2 billion by March 2030. It is important to note that while the first five years of projections are based on analyst estimates, cash flows beyond that point are extrapolated by Simply Wall St.

This cash flow trajectory, evaluated through a two-stage Free Cash Flow to Equity model, results in an intrinsic value of ¥3,568 per share for Santen Pharmaceutical. When compared to the stock’s current share price, this indicates the company’s shares are trading at a sizable 54.6% discount to their estimated fair value. This suggests strong potential upside for patient investors.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Santen Pharmaceutical.

Our Discounted Cash Flow (DCF) analysis suggests Santen Pharmaceutical is undervalued by 54.6%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

Approach 2: Santen Pharmaceutical Price vs Earnings

For profitable businesses like Santen Pharmaceutical, the Price-to-Earnings (PE) ratio is a time-tested way to assess valuation. It provides a quick snapshot of how much investors are willing to pay today for each yen of company earnings. Generally, higher expected growth and lower risk justify a higher PE ratio. Mature or riskier companies usually trade on lower multiples.

Santen’s current PE ratio stands at 16.8x, which is slightly above the pharmaceutical industry average of 16.3x. Peer companies are trading around 20.2x, so Santen appears priced a bit below its peers. However, a raw comparison like this does not reveal the whole story, since every business has unique growth prospects, margins, and risks.

This is where Simply Wall St’s proprietary “Fair Ratio” comes in. The Fair Ratio reflects what would be an appropriate PE for Santen based on several factors specific to the company: its earnings growth, profitability, industry profile, scale, and business risks. For Santen, the Fair Ratio is calculated at 20.2x. This indicates that, all else equal, the company could reasonably be valued at a higher multiple than it currently commands. Unlike a simple industry average, the Fair Ratio delivers a more tailored benchmark that truly accounts for what makes Santen unique.

Comparing Santen’s actual PE ratio (16.8x) to its Fair Ratio (20.2x) suggests the stock is undervalued based on current fundamentals and outlook.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Santen Pharmaceutical Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives. A Narrative is a clear, simple story that you create about a company, linking your assumptions about its future sales, profit margins, and earnings to its estimated fair value. Instead of just relying on rigid ratios, Narratives let investors put their reasoning and expectations directly alongside the numbers, essentially connecting your view of Santen Pharmaceutical’s future to a financial forecast and a fair value, all in one place.

With Narratives on Simply Wall St’s Community page, anyone, from beginners to seasoned pros, can build and share their perspective, compare Fair Value to today’s Price, and see exactly when their story suggests it is time to buy or sell. As new news or earnings are released, Narratives are automatically updated, ensuring your view always reflects the latest information. For example, one Santen investor might be bullish, forecasting the company’s fair value as high as ¥4,000, while another, more cautious voice might see fair value down near ¥3,000. Narratives help you decide which story and which strategy best fit your outlook.

Do you think there's more to the story for Santen Pharmaceutical? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com