Undervalued United Therapeutics Corporation (UTHR)The Acquirer's Multiple
One of the cheapest stocks in our All Investable Stock Screener is United Therapeutics Corporation (NASDAQ: UTHR).
United Therapeutics specializes in drug development for pulmonary arterial hypertension, a rare and progressive disease marked by abnormally high blood pressure in the arteries of the lungs. The firm is a market leader in two of the three primary drugs classes used to treat PAH. Nearly all of its sales are generated within the United States. United also markets a pediatric oncology drug.
A quick look at United Therapeutics share price history over the past twelve months shows that the price is down 12.5%, but here’s why the company remains undervalued.
The following data is from the company’s latest financial statements, dated March 2018.
The company’s latest balance sheet shows that United Therapeutics has $1.257 Billion in total cash and cash equivalents. Further down the balance sheet we can see that the company has $250 Million in total debt. Therefore, United Therapeutics has a net cash position of $1.007 Billion (cash minus debt).
If we consider that United Therapeutics currently has a market cap of $4.706 Billion, when we subtract the net cash totaling $1.007 Billion that equates to an Enterprise Value of $3.699 Billion.
If we move over to the company’s latest income statements we can see that United Therapeutics has $1.079 Billion* in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 3.42, or 3.42 times operating earnings. That places United Therapeutics squarely in undervalued territory.
The Acquirer’s Multiple is defined as:
Enterprise Value/Operating Earnings*
*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that United Therapeutics generated trailing twelve month operating cash flow of $519 Million and had $108 Million in Capex. That equates to $411 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 11%.
In terms of United Therapeutics’ annualized Return on Equity (ROE) for the quarter ending March 2018. A quick calculation shows that the company had $2.102 Billion in equity for the quarter ending December 2017 and $2.369 Billion for the quarter ending March 2018. If we divide that number by two we get $2.235 Billion. If we consider that the company has $484 Million (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending March 2018 of 22%.
In summary, United Therapeutics is trading on a P/E of 9.8, which is considerably lower than its 5Y average of 18.6**, and an Acquirer’s Multiple of 3.42, or 3.42 times operating earnings. The company has a strong balance sheet, with a net cash position of $1.007 Billion and a cash-debt ratio of 5x. United Therapeutics has a FCF/EV Yield of 11% (ttm) and an annualized Return on Equity (ROE) for the quarter ending March 2018 of 22% (ttm). All of which indicates that the company remains undervalued.
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