Earnings

A Side-by-side Analysis of Incyte Corporation (INCY) and PTC Therapeutics, Inc. (PTCT)

Incyte Corporation (NASDAQ:INCY) shares are down more than -6.46% this year and recently increased 1.86% or $1.74 to settle at $95.53. PTC Therapeutics, Inc. (NASDAQ:PTCT), on the other hand, is up 47.66% year to date as of 12/06/2017. It currently trades at $16.42 and has returned 1.19% during the past week.

Incyte Corporation (NASDAQ:INCY) and PTC Therapeutics, Inc. (NASDAQ:PTCT) 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.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Comparatively, PTCT is expected to grow at a -9.51% annual rate. All else equal, INCY’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. INCY’s ROI is 13.20% while PTCT has a ROI of -60.90%. The interpretation is that INCY’s business generates a higher return on investment than PTCT’s.

Cash Flow 




Cash is king when it comes to investing. INCY’s free cash flow (“FCF”) per share for the trailing twelve months was +0.09. Comparatively, PTCT’s free cash flow per share was -0.39. On a percent-of-sales basis, INCY’s free cash flow was 1.72% while PTCT converted -0.02% of its revenues into cash flow. This means that, for a given level of sales, INCY 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. INCY has a current ratio of 4.80 compared to 3.10 for PTCT. This means that INCY can more easily cover its most immediate liabilities over the next twelve months. INCY’s debt-to-equity ratio is 0.01 versus a D/E of 0.98 for PTCT. PTCT is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

INCY trades at a forward P/E of 471.31, a P/B of 11.03, and a P/S of 13.53, compared to a P/B of 4.56, and a P/S of 4.71 for PTCT. INCY is the expensive of the two stocks on an earnings, book value and sales basis. 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. INCY is currently priced at a -35.73% to its one-year price target of 148.63. Comparatively, PTCT is -1.08% relative to its price target of 16.60. This suggests that INCY 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 2.00 for INCY and 2.80 for PTCT, which implies that analysts are more bullish on the outlook for PTCT.

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. INCY has a beta of 0.76 and PTCT’s beta is 1.26. INCY’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.INCY has a short ratio of 3.32 compared to a short interest of 6.82 for PTCT. This implies that the market is currently less bearish on the outlook for INCY.

Summary

Incyte Corporation (NASDAQ:INCY) beats PTC Therapeutics, Inc. (NASDAQ:PTCT) on a total of 10 of the 14 factors compared between the two stocks. INCY is growing fastly, 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. INCY is more undervalued relative to its price target. Finally, INCY has better sentiment signals based on short interest.

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