Synergy Pharmaceuticals Inc. (NASDAQ:SGYP) shares are up more than 8.52% this year and recently increased 5.22% or $0.12 to settle at $2.42. Depomed, Inc. (NASDAQ:DEPO), on the other hand, is up 5.22% year to date as of 01/10/2018. It currently trades at $8.47 and has returned 1.80% during the past week.
Synergy Pharmaceuticals Inc. (NASDAQ:SGYP) and Depomed, Inc. (NASDAQ:DEPO) are the two most active stocks in the Drug Manufacturers – Other industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Comparatively, DEPO is expected to grow at a 25.00% annual rate. All else equal, DEPO’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. EBITDA margin of 31.21% for Depomed, Inc. (DEPO).
If there’s one thing investors care more about than earnings, it’s cash flow. SGYP’s free cash flow (“FCF”) per share for the trailing twelve months was -0.26. Comparatively, DEPO’s free cash flow per share was -0.05.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. SGYP has a current ratio of 4.30 compared to 0.80 for DEPO. This means that SGYP can more easily cover its most immediate liabilities over the next twelve months.
SGYP trades at a P/S of 90.29, compared to a forward P/E of 12.78, a P/B of 2.69, and a P/S of 1.30 for DEPO. 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. SGYP is currently priced at a -67.99% to its one-year price target of 7.56. Comparatively, DEPO is -18.4% relative to its price target of 10.38. This suggests that SGYP 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 SGYP and 2.70 for DEPO, which implies that analysts are more bullish on the outlook for DEPO.
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. SGYP has a beta of 1.24 and DEPO’s beta is 1.24. DEPO’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. SGYP has a short ratio of 10.42 compared to a short interest of 6.22 for DEPO. This implies that the market is currently less bearish on the outlook for DEPO.
Synergy Pharmaceuticals Inc. (NASDAQ:SGYP) beats Depomed, Inc. (NASDAQ:DEPO) on a total of 7 of the 13 factors compared between the two stocks. SGYP generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, SGYP is the cheaper of the two stocks on an earnings and book value, SGYP is more undervalued relative to its price target. Finally, WBA has better sentiment signals based on short interest.