Endo International plc (NASDAQ:ENDP) may be cheap for a reason. The company has been on my radar for a while, and I’ve been consistently disappointed in its investment thesis. My concerns are mainly around the sustainability of its future growth, the opportunity cost of investing in the stock accounting for the returns I could have gotten in other peers, and its cash-to-debt management. Whether a company has a good future, in terms of its business operation and financial health, is an important question to address.
Endo International plc, a specialty pharmaceutical company, manufactures and sells generic and branded pharmaceuticals in the United States, Canada, and internationally. Founded in 1920, it currently operates in Ireland at a market cap of US$1.25B.
The top-line decline of -13.50% was the first metric I noticed about ENDP. A consensus of 20 US pharmaceuticals analysts covering the stock indicates the future doesn’t look much better. According to their forecast, ENDP’s revenue level is estimated to decline by -19.54% by 2021. As ENDP is currently loss-making, this revenue headwind is expected to negatively impact its bottom-line, which should see a further decline from -US$1.23B to -US$144.41M.
Limiting your downside risk is an important part of investing, and financial health is a key determinant on whether ENDP is a risky investment or not. Alarm bells rang in my head when I saw ENDP’s debt level exceeds equity on its balance sheet, and its cash from its core activities is only enough to cover a mere 6.66% of this large debt amount. Furthermore, its debt-to-equity ratio has also been increasing from 279.30% five years ago, and its EBIT was not able to sufficiently cover its interest payment, with a cover of 1.29x. This induces further concerns around the sustainability of the business going forward. Although ENDP has high near term liquidity, with short term assets (cash and other liquid assets) covering upcoming one-year liabilities, it is not enough to cover longer term liabilities. This is not a big concern, though something we should be aware of. One reason I do like ENDP as a business is its low level of fixed assets on its balance sheet (7.87% of total assets). When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. ENDP has virtually no fixed assets, which minimizes its downside risk.
ENDP is now trading at US$5.62 per share. With 223.79 million shares, that’s a US$1.25B market cap, which is in-line with its peers based on its industry and adjusted for its asset level. Currently, it’s trading at a fair value, with a PB ratio of 2.59x vs. the industry average of 2.68x.
A good company is reflected in its financials, and for ENDP, the financials don’t look good. This is a fast-fail analysis, which means I won’t be spending too much time on the company, given that there is a universe of better investments to further research. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.