Regeneron Pharmaceuticals (NASDAQ:REGN) shareholders are no doubt pleased to see that the share price has had a great month, posting a 30% gain, recovering from prior weakness. However, the annual gain of 2.1% wasn’t so impressive.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. Perhaps the simplest way to get a read on investors’ expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
Does Regeneron Pharmaceuticals Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 22.83 that there is some investor optimism about Regeneron Pharmaceuticals. The image below shows that Regeneron Pharmaceuticals has a higher P/E than the average (18.4) P/E for companies in the biotechs industry.
Regeneron Pharmaceuticals’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Regeneron Pharmaceuticals’s earnings per share fell by 14% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 42%.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does Regeneron Pharmaceuticals’s Debt Impact Its P/E Ratio?
Since Regeneron Pharmaceuticals holds net cash of US$3.2b, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Regeneron Pharmaceuticals’s P/E Ratio
Regeneron Pharmaceuticals has a P/E of 22.8. That’s higher than the average in its market, which is 17.2. The recent drop in earnings per share would make some investors cautious, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls. What is very clear is that the market has become significantly more optimistic about Regeneron Pharmaceuticals over the last month, with the P/E ratio rising from 17.5 back then to 22.8 today. For those who prefer to invest with the flow of momentum, that might mean it’s time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Regeneron Pharmaceuticals may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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