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Comparing Geron Corporation (GERN) and Shire plc (SHPG)

Geron Corporation (NASDAQ:GERN) shares are up more than 113.89% this year and recently decreased -3.51% or -$0.14 to settle at $3.85. Shire plc (NASDAQ:SHPG), on the other hand, is down -1.89% year to date as of 04/13/2018. It currently trades at $152.19 and has returned -2.90% during the past week.

Geron Corporation (NASDAQ:GERN) and Shire plc (NASDAQ:SHPG) are the two most active stocks in the Biotechnology 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.

Growth

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 GERN to grow earnings at a 5.00% annual rate over the next 5 years. Comparatively, SHPG is expected to grow at a 9.80% annual rate. All else equal, SHPG’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. EBITDA margin of 40.44% for Shire plc (SHPG). GERN’s ROI is -28.20% while SHPG has a ROI of 4.30%. The interpretation is that SHPG’s business generates a higher return on investment than GERN’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. GERN’s free cash flow (“FCF”) per share for the trailing twelve months was -0.03. Comparatively, SHPG’s free cash flow per share was +1.04. On a percent-of-sales basis, GERN’s free cash flow was -0.45% while SHPG converted 2.08% of its revenues into cash flow. This means that, for a given level of sales, SHPG is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. GERN has a current ratio of 14.70 compared to 1.00 for SHPG. This means that GERN can more easily cover its most immediate liabilities over the next twelve months. GERN’s debt-to-equity ratio is 0.00 versus a D/E of 0.54 for SHPG. SHPG is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

GERN trades at a P/B of 5.92, and a P/S of 577.53, compared to a forward P/E of 9.35, a P/B of 1.27, and a P/S of 3.14 for SHPG. GERN is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B 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. GERN is currently priced at a -30% to its one-year price target of 5.50. Comparatively, SHPG is -22.91% relative to its price target of 197.42. This suggests that GERN is the better investment over the next year.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. GERN has a beta of 2.27 and SHPG’s beta is 1.32. SHPG’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. GERN has a short ratio of 6.40 compared to a short interest of 1.69 for SHPG. This implies that the market is currently less bearish on the outlook for SHPG.

Summary

Shire plc (NASDAQ:SHPG) beats Geron Corporation (NASDAQ:GERN) on a total of 10 of the 14 factors compared between the two stocks. SHPG higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, SHPG is the cheaper of the two stocks on book value and sales basis, Finally, SHPG has better sentiment signals based on short interest.

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