Celgene Corporation (NASDAQ:CELG) shares are down more than -12.89% this year and recently decreased -2.22% or -$2.29 to settle at $100.83. Tesaro, Inc. (NASDAQ:TSRO), on the other hand, is down -37.09% year to date as of 11/29/2017. It currently trades at $84.60 and has returned 0.82% during the past week.
Celgene Corporation (NASDAQ:CELG) and Tesaro, Inc. (NASDAQ:TSRO) are the two most active stocks in the Biotechnology industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CELG to grow earnings at a 20.21% annual rate over the next 5 years. Comparatively, TSRO is expected to grow at a 24.80% annual rate. All else equal, TSRO’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 EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Celgene Corporation (CELG) has an EBITDA margin of 37.35%. This suggests that CELG underlying business is more profitable CELG’s ROI is 11.70% while TSRO has a ROI of -49.00%. The interpretation is that CELG’s business generates a higher return on investment than TSRO’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. CELG’s free cash flow (“FCF”) per share for the trailing twelve months was +1.28. Comparatively, TSRO’s free cash flow per share was +0.10. On a percent-of-sales basis, CELG’s free cash flow was 8.98% while TSRO converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, CELG is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CELG has a current ratio of 3.70 compared to 4.70 for TSRO. This means that TSRO can more easily cover its most immediate liabilities over the next twelve months. CELG’s debt-to-equity ratio is 0.77 versus a D/E of 0.34 for TSRO. CELG is therefore the more solvent of the two companies, and has lower financial risk.
CELG trades at a forward P/E of 11.56, a P/B of 8.03, and a P/S of 6.39, compared to a P/B of 11.26, and a P/S of 25.79 for TSRO. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. CELG is currently priced at a -18.67% to its one-year price target of 123.97. Comparatively, TSRO is -43.79% relative to its price target of 150.50. This suggests that TSRO 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 2.10 for CELG and 2.00 for TSRO, which implies that analysts are more bullish on the outlook for CELG.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. CELG has a beta of 1.80 and TSRO’s beta is 1.65. TSRO’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. CELG has a short ratio of 1.26 compared to a short interest of 7.95 for TSRO. This implies that the market is currently less bearish on the outlook for CELG.
Tesaro, Inc. (NASDAQ:TSRO) beats Celgene Corporation (NASDAQ:CELG) on a total of 7 of the 14 factors compared between the two stocks. TSRO is more profitable, higher liquidity and has lower financial risk. TSRO is more undervalued relative to its price target. Finally, IMUC has better sentiment signals based on short interest.