Although Regeneron (currently trading at $845.04 per share) has gained 8.1% over the last six months, it has trailed the S&P 500’s 13.6% return during that period. This may have investors wondering how to approach the situation.
Is now the time to buy Regeneron, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Regeneron Not Exciting?
We’re cautious about Regeneron. Here are three reasons why REGN doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Regeneron’s 4.6% annualized revenue growth over the last five years was mediocre. This fell short of our benchmark for the healthcare sector.
2. Free Cash Flow Margin Dropping
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Regeneron’s margin dropped by 31.1 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Regeneron’s free cash flow margin for the trailing 12 months was 24.2%.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Unfortunately, Regeneron’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Regeneron isn’t a terrible business, but it isn’t one of our picks. With its shares underperforming the market lately, the stock trades at 13.6× forward P/E (or $845.04 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at our favorite semiconductor picks and shovels play.
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