Cheap Stocks Wall Street Loves: Celgene Corporation

Photo: Celgene Corporation.

When looking for promising candidates for your portfolio, it makes sense to seek out undervalued, or cheap, stocks. Analysts on Wall Street do the same, and they slap ratings on thousands of stocks. Ratings are positive far more often than they're negative; but the field of stocks with overwhelmingly positive ratings is still a promising place to hunt for great stocks. One company such a search would turn up is Celgene Corporation (CELG).

How cheap is it?
Founded in 1986, Celgene is a significant biopharmaceutical company with a market capitalization of about $74 billion, annual revenue topping $7 billion, and earnings near $1.5 billion. It's focused on treating cancer and immune-inflammatory diseases. Just how cheap is Celgene Corporation, and how much does Wall Street love it? Let's take a look:

Sources: Yahoo! Finance, Morningstar. 

The fact that Celgene's forward-looking P/E ratio is well below its five-year average suggests that it's undervalued. The fact that the forward P/E is so much lower than the current one reflects much higher expected earnings during the coming year.

Meanwhile, Celgene's PEG ratio is also attractive, as it's well under one. A PEG ratio divides a company's P/E ratio by its expected five-year earnings growth rate, and a result of one suggests a fairly valued company. Results below one suggest undervaluation, and PEG ratios higher than one suggest overvalued companies. The PEG ratio isn't foolproof, but it can help you identify some great buys.

Wall Street analysts are clearly quite bullish on Celgene, though they don't seem to expect a massive return any time soon.

Why Wall Street loves Celgene
Why would someone want to own Celgene? Well, unlike many biotechnology companies, it actually has a bunch of FDA-approved treatments on the market, generating revenue and profits. Its Revlimid treats multiple myeloma, myelodysplastic syndromes (MDS), and mantle cell lymphoma, while Vidaza treats intermediate-2 and high-risk MDS, and chronic myelomonocytic leukemia, as well as acute myeloid leukemia (AML). Abraxane treats breast, non-small cell lung, pancreatic, and gastric cancers. It has other approved formulas, as well, and its drugs in development are targeting hematological and solid tumor cancers, including multiple myeloma, myelodysplastic syndromes, chronic lymphocytic leukemia (CLL), non-Hodgkin's lymphoma (NHL), small cell lung cancer, and prostate cancer.

Three of Celgene's drugs -- Revlimid, Abraxane, and multiple myeloma treatment Pomalyst -- are enjoying rapid sales growth. Respectively, their sales grew by 15%, 39%, and 143% year over year in the second quarter.

Photo: Celgene Corporation.

The biotechnology and pharmaceutical industries carry certain risks, such as new drugs in development that are eating up a lot of time and money, and occasionally not gaining FDA approval. Even approved drugs can end up eclipsed by competing products. But there's an upside, too, in that patients taking a certain medication are likely to keep doing so, no matter what the economy is doing. If you're fighting a disease, you don't view your drugs as optional.

Meanwhile, a glance at Celgene's financial statements offers  more to love, such as a net margin topping 20%, and an increasing gross margin. The company pays no dividend, but its share count has fallen by about 9% during the past five years, which boosts its earnings per share and rewards shareholders. Celgene is free-cash-flow positive, too, to the tune of more than $2 billion annually.

Why you might hold off on Celgene
Of course, few stocks have nothing but promise to offer. Celgene has some fast-growing drugs; but it also has some with shrinking sales. Sales of Vidaza and Thalomid, down 28% and 18% in the second quarter, have some investors rattled. Also, the company has suggested that its new Otezla auto-immune drug might be a blockbuster with $1.5 billion in sales by 2017. That's very exciting, but initial sales have been quite modest. (Celgene is hoping it will gain approval for wider use, which will boost sales considerably.)

Meanwhile, Abraxane's steep price led to its being rejected by the U.K.'s National Health Service. That's not a good thing, but the company might get it approved at a later date -- and a lower price.

Other concerns include considerable dependence on Revlimid above all its other drugs for the lion's share of its revenue. Also, the company's debt has risen sharply in recent years, but its cash pile tops it.

Photo: Celgene Corporation.

Is it time to buy?
This certainly looks like a promising time to invest in some shares of Celgene. (I did so, myself, last year.) It already seems undervalued, and it has a strong array of drugs on sale and in development, with plenty of catalysts that could spur business more, in the form of FDA approvals for new drugs, or approvals for expanded treatments for existing drugs. Take a closer look at the company, and see if it seems like a good fit for your portfolio.