Earnings

Critical Comparison: Nektar Therapeutics (NKTR) vs. Dermira, Inc. (DERM)

Nektar Therapeutics (NASDAQ:NKTR) shares are up more than 17.48% this year and recently increased 1.10% or $0.76 to settle at $70.16. Dermira, Inc. (NASDAQ:DERM), on the other hand, is up 0.61% year to date as of 01/18/2018. It currently trades at $27.98 and has returned 5.62% during the past week.

Nektar Therapeutics (NASDAQ:NKTR) and Dermira, Inc. (NASDAQ:DERM) are the two most active stocks in the Biotechnology industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

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 NKTR to grow earnings at a -7.30% annual rate over the next 5 years.



Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use Return on Investment (ROI) as measures of profitability and return. NKTR’s ROI is -33.80% while DERM has a ROI of -36.60%. The interpretation is that NKTR’s business generates a higher return on investment than DERM’s.

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. NKTR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.57. Comparatively, DERM’s free cash flow per share was -0.78. On a percent-of-sales basis, NKTR’s free cash flow was 0.05% while DERM converted -0.14% of its revenues into cash flow. This means that, for a given level of sales, NKTR 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. NKTR has a current ratio of 4.10 compared to 4.70 for DERM. This means that DERM can more easily cover its most immediate liabilities over the next twelve months. NKTR’s debt-to-equity ratio is 2.94 versus a D/E of 1.40 for DERM. NKTR is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

NKTR trades at a P/B of 129.93, and a P/S of 44.69, compared to a P/B of 5.87, and a P/S of 46.59 for DERM. NKTR is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. NKTR is currently priced at a 83.95% to its one-year price target of 38.14. Comparatively, DERM is -34.37% relative to its price target of 42.63. This suggests that DERM 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 1.70 for NKTR and 1.90 for DERM, which implies that analysts are more bullish on the outlook for DERM.

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. NKTR has a short ratio of 4.34 compared to a short interest of 8.06 for DERM. This implies that the market is currently less bearish on the outlook for NKTR.

Summary

Dermira, Inc. (NASDAQ:DERM) beats Nektar Therapeutics (NASDAQ:NKTR) on a total of 6 of the 14 factors compared between the two stocks. DERM generates a higher return on investment, higher liquidity and has lower financial risk. DERM is more undervalued relative to its price target. Finally, OHRP has better sentiment signals based on short interest.

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