TherapeuticsMD, Inc. (NASDAQ:TXMD) shares are up more than 3.47% this year and recently increased 1.70% or $0.1 to settle at $5.97. Heron Therapeutics, Inc. (NASDAQ:HRTX), on the other hand, is up 19.47% year to date as of 11/15/2017. It currently trades at $15.65 and has returned -7.40% during the past week.
TherapeuticsMD, Inc. (NASDAQ:TXMD) and Heron Therapeutics, Inc. (NASDAQ:HRTX) are the two most active stocks in the Drug Manufacturers – Major industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect TXMD to grow earnings at a 15.00% annual rate over the next 5 years. Comparatively, HRTX is expected to grow at a 34.85% annual rate. All else equal, HRTX’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. TXMD’s ROI is -70.80% while HRTX has a ROI of -540.90%. The interpretation is that TXMD’s business generates a higher return on investment than HRTX’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. TXMD’s free cash flow (“FCF”) per share for the trailing twelve months was -0.09. Comparatively, HRTX’s free cash flow per share was -0.75. On a percent-of-sales basis, TXMD’s free cash flow was -0.1% while HRTX converted -3.19% of its revenues into cash flow. This means that, for a given level of sales, TXMD is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. TXMD has a current ratio of 14.40 compared to 2.10 for HRTX. This means that TXMD can more easily cover its most immediate liabilities over the next twelve months. TXMD’s debt-to-equity ratio is 0.00 versus a D/E of 0.71 for HRTX. HRTX is therefore the more solvent of the two companies, and has lower financial risk.
TXMD trades at a P/B of 8.29, and a P/S of 74.76, compared to a P/B of 21.15, and a P/S of 41.15 for HRTX. TXMD is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. TXMD is currently priced at a -57.17% to its one-year price target of 13.94. Comparatively, HRTX is -49.79% relative to its price target of 31.17. This suggests that TXMD is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.80 for TXMD and 1.80 for HRTX, which implies that analysts are equally bullish on their outlook for the two stocks.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. TXMD has a beta of 0.91 and HRTX’s beta is 2.06. TXMD’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. TXMD has a short ratio of 17.87 compared to a short interest of 15.22 for HRTX. This implies that the market is currently less bearish on the outlook for HRTX.
TherapeuticsMD, Inc. (NASDAQ:TXMD) beats Heron Therapeutics, Inc. (NASDAQ:HRTX) on a total of 8 of the 14 factors compared between the two stocks. TXMD generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. TXMD is more undervalued relative to its price target. Finally, MRK has better sentiment signals based on short interest.