|Market Growth LT||A-|
|Market Growth ST||F|
While Not Entirely Negative, Growth Indicators Show Several Signs of Weakness
United Therapeutics booked a total of $957.00 million in revenue during the 12 months ended last quarter, which represents a remarkable 128.40% increase from the equivalent period ended three years ago, in which total revenue was $419.00 million. Such strong sales growth momentum seems to have carried into the company's latest quarterly report, in which total revenue of $245.14 million represented a 20.04% increase from the year earlier period's $204.21 million. This kind of top line growth is typical of companies gaining market share and, if managed smartly, should produce strong profits in the next few quarters. It also reported a yearly drop in profit during the last quarter from the year earlier period, a sudden reversal from the strong profit growth the company has been posting on a long term basis. MarketGrader measures long term profit growth by comparing the latest full year profit (12-month trailing) to the equivalent period's results three years earlier. United Therapeutics's First quarter net fell 11.92% to $62.32 million from the year earlier profit of $70.76 million (excluding extraordinary items) , which contrasts with its growth in 12-month trailing profit over a three year period. Also including last quarter's results, the company's profit grew to $296.01 million for the 12 months ended March 31, 2013, a 1075.00% jump from full year profit of $25.19 million reported for the period ended three years earlier. The company's margins contracted during the latest quarter with an average 10.81% decline in EBITDA, operating and net margins from a year earlier, reversing the preceding quarter's margin expansion.
Despite a considerable earnings shortfall reported by the company on April 25, 2013, in which earnings per share were 19.05% lower than what analysts were expecting, the stock fell only 1.61% following the news. Despite this negative report, its earnings surprise record, calculated by MarketGrader as the average of the last six reports, continues to be positive; it has beaten the consensus estimate by an average of 11.79% over such period.
|Price/Cash Flow Ratio||A|
Assuming the Company's Fundamentals Don't Deteriorate in Coming Quarters, the Stock's Valuation is Acceptable at this Level
Shares of United Therapeutics are trading currently at 12.13 times trailing 12-month earnings. This P/E ratio represents a 73.12% discount to the MarketGrader-calculated "optimum" P/E ratio of 38.39, which is based on the company's two-year EPS growth rate. According to this calculation, which looks at the company's growth across rolling 12-month periods, United Therapeutics's earnings per share have grown at an impressive annualized rate of 81.33% in the last two years. This growth has resulted in strong financial performance, evidenced by the company's Profitability grade. For this to continue, it must reverse its recent margin slide soon. The stock also trades at 10.32 times forward earnings estimates for the next four quarters, lower than its trailing P/E and the S&P 500 index's forward P/E of 15.20. By placing a lower multiple on the company's future earnings than it does on the market as a whole, investors may see the company as financially strong but with relatively poor growth prospects. This may offer a valuable opportunity for patient investors willing to wait for future earnings reports.
United Therapeutics's current market value is 3.12 times its tangible book value, which excludes intangible assets such as goodwill; this valuation seems attractive, especially considering that only 1.36% of the company's total stockholders' equity is based on intangible assets. When the value of those assets is added back into total book value, the price to book ratio is an even lower 3.08. Based on the $7.33 in cash flow per share generated by the company in the last twelve months, at the current price of $67.61 the stock trades at 9.23 times cash flow, an attractive valuation considering the strength of its overall fundamentals. Its shares also trade at 3.55 times its trailing 12-month sales, a small 96.90% discount to the Pharmaceuticals: Other industry average price to sales ratio of 113.48. Our final value indicator looks at the relationship between the company's current market capitalization and its operating profits after deducting taxes. By this measure United Therapeutics's $3.44 billion market cap is excessively high considering it is 48.78 times its most recently reported net income plus depreciation (added back since it's a non-cash charge).
|Return on Equity||B+|
|Quality of Revenues||A+|
Profitability Record Is Excellent Across the Board Suggesting a Very Well Managed Operation
United Therapeutics has a strong 12-month trailing profitability record based on solid returns on shareholder equity, operating margins that exceed its peer group average and a remarkable net profit margin. The $296.01 million net profit earned by the company in the last four quarters was equivalent to 30.93% of total sales. Operating income during that same period accounted for 43.44% of sales, 214.38% higher than the average operating margin for the Pharmaceuticals: Other industry, which was 13.26%. Based on its trailing 12-month earnings, United Therapeutics return on equity of 25.72% is a very strong indicator of profitability and a positive reflection on the company's management efficiency. However, it represents a decline from the year earlier period's return on equity of 26.20%, possibly spelling a slowdown in the company's business.
Despite this moderate downturn the company's leverage is low enough that it could be increased without overburdening the company in order to ensure that current profitanility is sustained. Its total debt is only 0.24 times total equity while long term debt makes up 19.44% of total capital. United Therapeutics'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 $449.22 million, or 8.74% above the $413.10 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||A+|
|Interest Cov. Capacity||A+|
Outstanding Cash Flow Indicators Show the Company Is Managed Smartly and in the Best Interest of its Shareholders
United Therapeutics's cash flow grew considerably in its latest quarter to $97.70 million, a 159.94% increase from $37.58 million reported in the year earlier period. This growth seems to be accelerating considering that in the last twelve months the company's cash flow was 63.69% higher than the twelve months ended a year ago, a nice increase but quite lower than the current pace. This upward trend should boost its margins and overall profitability in the next few quarters. Even though the company has $277.70 million in total debt, its net debt is virtually zero since it has $670.64 million in cash on hand; and since it generated $103.44 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 63.98% from last year's $408.97 million, its leverage actually fell, with total debt as a percentage of total capital now at 19.44% compared to 20.74% a year ago.
An important indicator of management efficiency used by MarketGrader is Economic Value Added, or EVA, which measures each company's true return to shareholders after accounting not only for the cost of running the business (operating costs) but also the cost of the capital it employs. By measuring the real cost of capital, both equity and debt, EVA measures the creation of true economic profit. In this case United Therapeutics had $1.43 billion in invested capital in its most recent quarter, a combination of both equity and long term debt. However, the company's weighted cost of equity of 5.52% is much larger than the weighted cost of debt, which is 0.85%. When combined, the two result in a total cost of capital of 6.37%, quite low compared to the company's total return on invested capital of 29.11% based on 12-month trailing operating income. The result is an excellent economic value added of 22.73%, a very high return to investors after all capital costs are covered. United Therapeutics does not pay a dividend and hasn't done so within at least the last five years.