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# How Cheap Is Celgene's Stock by the Numbers?

Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

• The current price multiples.
• The consistency of past earnings and cash flow.
• How much growth we can expect.

Let's see what those numbers can tell us about how expensive or cheap Celgene (Nasdaq: CELG  ) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

Celgene has a P/E ratio of 24.4 and an EV/FCF ratio of 18.2 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Celgene has a P/E ratio of 106.2 and a five-year EV/FCF ratio of 35.2.

A positive one-year ratio under 10 for both metrics is ideal (at least in my opinion). For a five-year metric, under 20 is ideal.

Celgene is zero for four on hitting the ideal targets, but let's see how it compares against some competitors and industry mates.

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

Celgene 24.4 18.2 106.2 35.2
Biogen Idec (Nasdaq: BIIB  ) 23.1 17.6 30.6 23.0
Merck (NYSE: MRK  ) 25.4 9.7 17.9 16.8
Amgen (Nasdaq: AMGN  ) 13.4 8.7 12.6 9.0

Source: S&P Capital IQ.

Numerically, we've seen how Celgene's valuation rates on both an absolute and relative basis. Next, let's examine...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, Celgene's net income margin has ranged from -64.1% to 27.9%. In that same time frame, unlevered free cash flow margin has ranged from 8.3% to 36.4%.

How do those figures compare with those of the company's peers? See for yourself:

Source: S&P Capital IQ; margin ranges are combined.

Additionally, over the last five years, Celgene has tallied up four years of positive earnings and five years of positive free cash flow.

Next, let's figure out...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, Celgene has put up past EPS growth rates of 76.5%. Meanwhile, Wall Street's analysts expect future growth rates of 23.3%.

Here's how Celgene compares to its peers for trailing five-year growth:

Source: S&P Capital IQ; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years:

Source: S&P Capital IQ; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us the price multiples shares of Celgene are trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 24.4 P/E ratio, and we see that its one-year EV/FCF ratio is a bit lower, helped by a net cash balance (i.e., more cash than debt). We also see that Celgene's been on a growth tear as Revlimid sales ramped up. The question is whether Celgene can continue to grow accretively via innovation, partnerships like its recent deal with Quanticel, acquisitions like its purchase of Abraxis BioScience last year, and maximizing its current products and pipeline. If so, its slightly premium multiples may be justified.

But so far, you've just seen the initial numbers. If you find Celgene's numbers or story compelling, don't stop. Continue your due diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.

To see the stocks that I've researched beyond the initial numbers and bought in my public real-money portfolio, click here.

Anand Chokkavelu doesn't own shares in any company mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

• ###### Report this Comment On December 08, 2011, at 3:23 PM, biotech101invest wrote:

YES CELG IS CHEAP

How do you talk about how cheap a company is without looking at PE to Growth - or PEG ratio. Again I Here are calculations through 2014 EPS ests which DOES NOT INCLUDE CHINA OR MEXICO OR BRAZIL for Revlimid or any sales for Pomalidomide – CELG trading at 0.4 PEG ratio on 14 numbers. And that is with an UNDERSTATED growth rate and in my opinion and EPS that is at least \$1.00-\$1.50 light. So it’s really .20 or .25. 60 to 75% discount. NO ONE IN THE ENTIRE S&P 500 HAS this EPS GROWTH AT THIS DISCOUNT NOT EVEN HALF THIS DISCOUNT

Here is the comparison to biotech peers:

Company 2011-2012-2013-2014

AMGN 1.2x 1.1x 1.0x 0.9x

CELG 0.7x 0.6x 0.5x 0.4x (0.4 based on a growth rate that is 10% low and EPS that is \$1.00+ low in my opinon)

BIIB 1.4x 1.3x 1.2x 1.0x

· We all know that the 2015 \$8 EPS is very conservative and if you recalculate with the buyback effect, Apremilast in psoriatic arthritis at least, realistic R&D and other expenses not based on the same percentage of revenues as now with 25+ ph 3 trials given that revenue will more than double, and real international sales for China, Brazil, Mexico in 2015 that the number is closer to \$10 than \$8. \$11 is possible in my opinion. If they accelerate the buyback and get your growth rate up to 35% plus which is possible by then – well CELG could be \$175 to \$250+ in 2015. Looks like next yr could show at least \$5 EPS.

YES CELG IS CHEAP

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Anand is the Editorial Director of Fool.com. He loves pithiness, clever turns of phrase, and analyzing the banking sector.

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