Success Cells
The biotechnology industry offers a compelling investment proposition for those looking to engage with the cutting edge of innovation. Those looking to invest in this space should focus on companies with a strong R&D foundation, a diversified product pipeline, and a proven track record of bringing treatments from the concept stage to commercial success.
We will present one of the leading companies in this industry, but first, let’s delve into a short update on the economy and markets, and the Smart Investor calendar.
Last Week’s Portfolio Movers
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Super Micro Computer (SMCI) shares surged 22% over the week, gaining 162% since purchase three months ago, due to the company’s blockbuster earnings and a strong guidance upgrade.
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ON Semiconductor (ON) shares jumped this week, reversing some of this year’s losses, after the chip manufacturer’s Q4 2023 numbers exceeded analysts’ expectations.
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Broadcom (AVGO) continued its climb higher as JP Morgan analysts reinstated coverage with “Buy”, adding the stock to the bank’s “Focus” list of promising stocks.
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Check Point (CHKP) topped consensus earnings and revenue expectations, with analysts’ upgrades supporting positive momentum.
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Cigna’s (CI) price targets were upgraded by several analysts, as the company beat on earnings and guidance raise.
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Parker Hannifin (PH) also blew past estimates by a wide margin and raised FY24 EPS guidance; the stock surged over 7% over a week.
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Vertex Pharmaceuticals (VRTX) slid over 6% in a week despite a strong beat on earnings, as its new non-opioid pain medicine delivered positive, but weaker-than-expected clinical trial results. Analysts, however, were unphased as the drugmaker has an excellent lineup and multiple highly promising candidates in its pipeline.
Portfolio Earnings and Dividend Calendar
In the stock calendar, the Q4 2023 earnings season for Smart Investor Portfolio companies is beginning to wind down, with the quarterly results of ITT (ITT), Arista Networks (ANET), Wesco International (WCC), and Crane NXT (CXT) scheduled to be published in the next few days.
The ex-dividend date for Parker Hannifin (PH) is February 8th; for Jabil (JBL) and Applied Industrial Technologies (AIT) it is February 14th.
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Weekly Portfolio Trades
Today, we are performing two changes to the Smart Investor Portfolio: we are adding a formidable player in the biopharmaceutical industry, Regeneron Pharmaceuticals, and selling Lamb Weston.
New Buy: Regeneron Pharmaceuticals (REGN)
Regeneron Pharmaceuticals, Inc. is a New York-based biotechnology company which develops and commercializes medicines for the treatment of serious medical conditions, such as cancer, allergic and inflammatory diseases, eye diseases, and others.
Founded in 1988, Regeneron has grown exponentially through the years thanks to numerous medical breakthroughs. The company heavily invests in R&D to develop its treatments in-house, conducting very few acquisitions. REGN also relies on an extensive network of collaborations with pharma and biotechnology firms such as Bayer and Sanofi to pursue profitable and innovative treatments.
The company has been publicly traded on NASDAQ under the ticker “REGN” since 1991. Today, with a market cap of $103 billion and annual revenues of $13.12 billion, REGN ranks as #100 on the Fortune 500 list of the largest U.S. companies.
Proven Innovation
REGN is best known for its EYLEA injection, treating blindness in elderly patients. The drug has been on the market since 2011 and remains the company’s “cash cow.” In 2023, the company secured a patent for a high-dose version of the drug, EYLEA HD, minimizing potential damage from an impending original EYLEA patent expiration. Additionally, Regeneron’s immunology drug Dupixent, co-developed with Sanofi, offers a multi-billion dollar revenue stream that is projected to last until the end of this decade.
The company has a very robust, diversified pipeline of over 35 therapeutic candidates in various stages of clinical development, some of which are expected to enter the market this year and next. Notably, Regeneron’s unique flexibility of internally-developed pipeline drives potential for novel and differentiated combinations and additional treatment applications of its approved and under-development drugs.
REGN wields a proven ability to unlock lucrative market opportunities. Thus, the management has recently revealed the company’s move into the highly lucrative obesity market with two pipeline developments of muscle-conserving antibody drugs. The company is looking to work in synergy with the providers of GLP-1 medicines, which are effective for treating obesity though they also lead to substantial patient muscle loss. In addition, REGN has its own anti-obesity products in preclinical development, targeting a genetic approach to obesity treatment.
Financial Prowess
Regeneron Pharmaceuticals boasts outstanding financial health, highlighted by negative net debt (i.e. more cash than its total debt) and ample cash position. Its more-than-healthy finances are underlined by exceptionally high cash, current, and quick ratios. Combined, these metrics substantially reduce REGN’s sensitivity to interest rate fluctuations and other economic and market changes. Additionally, a strong financial position provides the company with significant options to pursue various business development opportunities, through strategic investments and acquisitions as well as internal capabilities.
The company’s capital efficiency metrics – Return on Equity, Return on Assets, and Return on Invested Capital – are in the top 5% for the Biotechnology industry. REGN also stands out due to its very strong profitability metrics, with its gross (52.6%), EBITDA (36.4%), operating (33.2%), and net (30.1%) profit margins ranking in the top tier of its industry.
In the past three years, REGN’s revenues have increased at an average annual rate of 18.1%, while its earnings-per-share rose at a rate of 16.3%. On February 2, 2023, the company shared its Q4 2023 and full-year 2023 financial results, exceeding analysts’ expectations on both metrics. In fact, REGN has surpassed EPS estimates in all quarters for which these estimates were available.
The quarterly and annual results demonstrate EYLEA’s continued market dominance despite strong competition, with the HD version’s successful launch counterweighing a decline in “original” EYLEA sales, adding to a positive revenue outlook. Another positive factor is the 34% annual growth in sales of the Dupixent immunology drug, with incremental market penetration, new indications, and younger populations representing a significant opportunity for continued growth. Additionally, the oncology drug Libtayo registered a 93% sales surge last year; it is now poised to exceed $1 billion in global net product sales in 2024, well on its way to becoming REGN’s next blockbuster product.
Shareholder Returns
Regeneron’s stock traded sideways in 2022, but strongly recovered mid-year 2023 on the back of robust financial results and positive prospects. It reached an all-time high in January 2024, but gave back some gains due to profit-taking. REGN gained 20% in the past 12 months and 90% in the past three years, which upped its valuation to over 50% above its long-term average. Despite that, it is still trading at a material discount to the Healthcare sector, and at roughly the midpoint of the valuation range for its peers in the industry. In addition, based on projected cash flows, the stock is trading ~40% lower than its fair value.
TipRanks-scored top Wall Street analysts see an average upside of 11.3% for the stock over the next 12 months. However, given its track record of converting R&D investment into cash-churning products, it may well surprise on the upside. REGN carries a TipRanks Smart Score rating of “Perfect 10” with a “Strong Buy” recommendation:
Stock price appreciation is far from being the only upside for Regeneron’s shareholders. While REGN doesn’t pay dividends (yet), it deploys excess cash to repurchase shares as a part of its stated capital allocation priorities. The company has been performing aggressive buybacks in recent years, with ~$12 billion in share repurchases since end-2019, including ~$2.2 billion in FY 2023. In February 2023, Regeneron’s management announced a new $3 billion share repurchase authorization, with ~$1.5 billion remaining as of December 31, 2023.
As for the dividends, the company’s management recently acknowledged that Regeneron’s enviable balance sheet strength and profitability metrics will allow it to become a dividend-paying company “in the foreseeable future.” This development will make this stock attractive for income investors, further supporting the stock’s price.
To conclude, Regeneron Pharmaceuticals is an exceptionally well-managed business with a track record of overcoming obstacles through creative approaches, innovation, and partnerships. The company’s stellar financial position allows for robust flexibility in business and financial pursuits, supporting the outlook for market share and revenue growth. While some short-term risk to stock performance arises from its historically high valuation, the company’s risk-reward position is favorable for long-term investors, with several additional upside factors arising from promising pipeline developments and the possible introduction of dividend payments. All in all, we believe that Regeneron can be a valuable addition to the Smart Investor portfolio.
New Sell: Lamb Weston Holdings (LW)
Lamb Weston Holdings, Inc. is one of the world’s largest producers and processors of frozen potato products. LW serves retail and food service customers, including grocery and specialty retailers, educational institutions, restaurants, and convenience stores.
LW is a stable, profitable business, with the only negative factor rising from its very high debt. The company has consistently surpassed analysts’ expectations on revenues and earnings. It has suffered from a large decline in sales in FY 2022-2023 as the post-pandemic resurgence dissipated, but nevertheless it has shown a strong sales rebound in FY 2024 (starting in May 2023). Still, sales volume growth in the U.S. is not expected to turn positive until at least FY 2025, depending on macro conditions affecting restaurant demand. Overseas demand is projected to remain weak in CY 2024.
The stock has been constantly praised by analysts during the past year or so, with price targets raised and outlook lifted several times. However, investors don’t seem to have received the memo, as the stock has been trading sideways over the past year. The markets have been skeptical toward Consumer Staples stocks overall, with the ambivalent sentiment continuing due to a lack of positive changes on the horizon.
While LW remains a very solid and profitable company, its stock doesn’t seem to be able to break out despite the positive earnings trend. We may reassess the company later on, but for the time being, we believe it is appropriate to sell the stock.
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Portfolio Stocks Under Review
In this section, we will flag stocks that may be let go from the portfolio.
General Dynamics (GD): The aerospace and defense company remains under review for potential sale with low urgency as the stock is overvalued. This increases its vulnerability to a pullback on any negative news, given that GD is a low-growth dividend stock.
Electronic Arts (EA): The videogames producer beat on EPS in the last quarter but missed estimates for net quarterly bookings. EA’s key product “Apex” experienced weak results, which offset gains for the EA Sports division. U.S. video game spending rose by just 1% year-on-year in 2023, while overall competition stiffened with several blockbuster releases from other game developers. EA’s 2024 growth prospects depend on the market rebounding as well as on the success of its new titles. The company is placed under review for potential sale with low urgency.
Charter Members of the 30% Winners Club
*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Our exclusive club’s ranks remained unchanged, still including eight stocks: SMCI, GE, AVGO, ANET, CDW, ORCL, WCC, and GD.
The next in line to enter the Winners’ ranks are Parker Hannifin (PH) and Check Point (CHKP), which rose 28.6% and 27.6%, respectively, since their purchase dates. Will one of them be able to close the gap, or will someone else outrun them to the finish line?
What’s Next?
Our next commentary will come out on Wednesday, February 14th, before the market opens.
Until then – we wish you a world of investment success!
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
