|Market Growth LT||A|
|Market Growth ST||A-|
The Company's Financials Show Very Solid Top and Bottom Line Growth in the Short and Long Term
Salix Pharmaceuticals had total revenue of $766.91 million in the 12 months ended last quarter, an outstanding increase of 230.29% from the same period ended three years earlier, in which it recorded $232.19 million in total sales. During more recent quarters the company has continued to grow its revenue at a similar rate, which suggests it might be taking market share from rivals. It booked total sales of $202.60 million last quarter, 18.39% more than what it sold in the same quarter a year ago. It will important to monitor the company's next few quarterly results closely for signs of any slowdown in such remarkable top line growth and to determine if this sales momentum being carried through to the company's bottom line. Also based on its latest report, profits grew very strongly last quarter when compared to the year earlier period and when measuring full year results against those of three years ago. Its First quarter net rose 125.47% to $22.44 million from the year earlier period in which it earned $9.95 million (excluding extraordinary items) in profits; and for the 12 months ended also in the first quarter the company reported net income of $76.73 million, reversing a loss of $54.86 million posted for the comparable period three years before. The company's ongoing margin contraction accelerated during its most recent quarter in which its EBITDA, operating and net margins fell an average of 16.31% from the year earlier period.
The company's May 10, 2013 earnings report missed analyst estimates by 8.70%; however, investors reacted positively to the results causing the stock to rise 7.68% after the announcement. Such a positive reaction could mean the company is expected to resume the trend of beating earnings estimates soon, making this latest report an anomaly; in its last six reports, including this one, it has reported earnings per share that have beaten the consensus estimate by an average of 20.86%.
|Price/Cash Flow Ratio||D|
Valuation Seems Very Rich Regardless of Company's Positive Fundamentals
** ** The stock's forward P/E of 15.58, based on its earnings estimate for the next four quarters, represents a premium to the S&P 500 index's forward P/E of 15.20 but is lower than its trailing P/E of 48.99. Therefore value could apparently be found in the company's future earnings growth even though relative to the market the stock might not seem cheap (the fundamentals may already be factored into the price). But assuming the company remains fundamentally strong, the stock might have further room to run, or at least be a relatively safe place to be if earnings estimates materialize into actual reported results.
Salix Pharmaceuticals's are trading at 6.35 times their book value, which is based on the company's stockholders' equity. However, MarketGrader's price to book value analysis is based on a company's tangible book value, which excludes goodwill and other intangibles from its assets. In this case, Salix Pharmaceuticalss' intangible assets of $622.41 million exceed its $586.68 million in stockholders' equity by $35.73 million, which means its tangible book value is negative. This makes the shares' price to tangible book ratio meaningless. Thus, part of the risk of owning the company's shares lies in the possibility of a significant write-down of its intangible assets, which would automatically make its shares much more expensive than they currently appear to be. The company generated $1.49 in cash flow per share over the last twelve months, which translates into a 39.36 price to cash flow ratio. Such a rich multiple suggests investors have very high hopes that the company's strong fundamental performance continues in the future. Its shares also trade at 4.67 times its trailing 12-month sales, a small 95.50% discount to the Pharmaceuticals: Other industry average price to sales ratio of 103.73. Finally, from a value perspective, we look at how much bigger the company's market capitalization is than its latest operating profits after subtracting taxes. By this measure Salix Pharmaceuticals's $3.63 billion market cap is excessively high considering it is 102.41 times its most recently reported net income plus depreciation (added back since it's a non-cash charge).
|Return on Equity||D|
|Quality of Revenues||C|
While Company's Profitability Grades Are Pretty Solid, They Offer Plenty of Room for Improvement
Salix Pharmaceuticals's profitability indicators offers an interesting contrast between strong margins and a very poor record of returns on shareholder equity based on the results for the last 12 months. During this period the company earned a $76.73 million net profit, equivalent to 10.01% of total sales and a very healthy net profit margin while its operating margin bested its peer group average. Operating income during that same period accounted for 27.20% of sales, 81.69% higher than the average operating margin for the Pharmaceuticals: Other industry, which was 13.90%. Salix Pharmaceuticals's business is showing clear signs of deterioration as seen in the weak return on equity of 13.08% achieved by the company in the last four quarters. This compares to the 20.42% return on equity recorded in the 12 months ended a year earlier.
In light of weakening profitability it will be important that the company doesn't expand its considerable leverage too much more. Its total debt is 1.47 times its total equity, with long term debt accounting for 60.67% of total capital. Both of these ratios are manageable assuming the company can stop the current slide. Salix Pharmaceuticals's core earnings in the last twelve months grew moderately from the twelve months ended a year earlier. The company's EBITDA for the most recent period was $243.46 million, or 18.94% above the $204.68 million earned from its core operations in the prior period. EBITDA is used by MarketGrader to measure the company's true earnings power since it includes interest expenses, income taxes, depreciation and amortization, all non-operating expenses, which are nevertheless accounted for in other parts of our analysis that look at EPS gains and net income.
|Cash Flow Growth||A+|
|Debt/Cash Flow Ratio||B+|
|Interest Cov. Capacity||A+|
Company's Cash Flow Indicators Are Solid Across the Board but Offer Some Room for Improvement
Salix Pharmaceuticals's negative cash flow of $-9.10 million booked in the latest quarter actually represents a 43.75% improvement over the $-16.19 million cash flow reported after last year's comparable period. While very healthy, this latest growth rate is significantly lower than the 75.40% increase in twelve month trailing cash flow compared to the year earlier period, underscoring a slowdown in the company's core operations. This could lead to lower earnings expectations and consequently a lower valuation for the stock. Even though the company has $864.81 million in total debt, its net debt is virtually zero since it has $960.29 million in cash on hand; and since it generated $51.79 million in earnings before interest, taxes, depreciation and amortization last quarter, it's safe to say its liquidity is remarkable. Therefore the company's debt is not only very manageable with its own cash flow but could be increased if it wanted to pursue strategic growth opportunities. The company also has the ability to enhance shareholder returns through dividends or by repurchasing its own shares, boosting the future value of its earnings. Even more positive is the fact that during the last 12 months while the company's cash on hand increased 44.22% from last year's $665.87 million, its leverage actually fell, with total debt as a percentage of total capital now at 59.58% compared to 64.34% a year ago.
Our Economic Value indicator measures the company's economic profit, or the return that accounts not only for the cost of running the business (operating expenses) but also the cost of capital invested in the business, including the opportunity cost to investors of having their capital tied up with the company instead of some other investment. Salix Pharmaceuticals had $1.45 billion of invested capital in its latest quarter, including equity and long term debt. Based on the operating income it earned in the last twelve months the company's return on invested capital was 14.63%. Its total weighted after tax cost of capital was pretty evenly distributed between equity and debt at 2.42% and 2.50% respectively for a total of 4.92%. Subtracting this cost from its return on investment results in Salix Pharmaceuticals 9.72% economic value added, which, while not remarkable, represents an acceptable return to its shareholders. Salix Pharmaceuticals does not pay a dividend and hasn't done so within at least the last five years.