The search for undervalued companies is a foundation of value investing, a method established by Benjamin Graham and commonly used by Warren Buffett. This approach requires finding stocks priced below their inherent worth, decided by examining a company's financial condition, earnings, and future possibilities. The aim is to discover good businesses the market has incorrectly priced for now, offering a "margin of safety" for investors. One way to simplify this search is to use systematic filters that sort for particular fundamental measures.
ACADIA Pharmaceuticals Inc (NASDAQ:ACAD) recently appeared through such a methodical filter, a "Decent Value" screen. This screen selects stocks with a good valuation score (above 7 out of 10) from ChartMill's fundamental analysis system, while also needing acceptable results in earnings, financial strength, and expansion. This mix tries to find not only low-priced stocks, but possibly mispriced companies with fundamental business quality. ACADIA, a biopharmaceutical company working on central nervous system conditions, seems to match this description.
Valuation: The Heart of the Possibility
For a value investor, a good price is the main starting point. It shows the possible difference from inherent worth. ACADIA's ChartMill Valuation Score of 7 points to a varied but finally interesting view.
- Relative Price: While its plain Price-to-Earnings (P/E) ratio of 35.01 seems elevated, perspective is key. Compared to similar companies in the changeable biotechnology field, ACADIA is priced more affordably than over 92% of companies based on both its P/E and Forward P/E ratios. Its Enterprise Value to EBITDA and Price/Free Cash Flow ratios show a comparable situation, ranking it more affordable than 93% and 96% of the industry, in order.
- Growth Consideration: An important measure for investors looking for expansion is the PEG ratio, which changes the P/E for anticipated earnings increase. ACADIA's low PEG ratio indicates its current price may not completely account for its growth path. Experts predict earnings per share to rise almost 40% each year on average in the next few years, which can support a higher earnings multiple.
This valuation picture is typical for a possible value find: a stock that looks costly alone but is actually marked at a notable discount compared to its field and its own future.
Financial Strength: Evaluating the Base
A secure balance sheet is essential for value investing, as it offers stability in difficult markets and pays for future expansion without high risk. ACADIA receives a firm Health Score of 7.
- No Debt Balance Sheet: A notable point is ACADIA's total absence of debt. This removes interest cost risk and gives great financial options, putting it with the most stable companies in its area regarding solvency.
- Good Liquidity: The company keeps strong liquidity, with a Current Ratio of 3.02 and a Quick Ratio of 2.94. This shows more than enough means to meet immediate liabilities, a vital detail for a company in a capital-heavy field like biotech.
- Altman-Z Score: A result of 5.23 shows a small short-term chance of financial trouble, supporting the idea of a steady base.
This financial strength supplies the "margin of safety" value investors want. It means the company can handle research challenges or market changes without harming its activities.
Earnings: The Source of Value Building
A low-priced stock must also be a profitable enterprise, or clearly moving toward profitability, to achieve its inherent worth. ACADIA's Earnings Score of 6 shows a shift to continued profits.
- Good Margins: The company does very well in margin measures. Its Gross Margin of 91.92% and Profit Margin of 24.94% place in the high group of the biotechnology field, doing better than over 93% and 95% of similar companies, in order. This shows price control and effective cost handling for its sold products.
- High Returns on Capital: Return on Equity (ROE) of 28.47% and Return on Assets (ROA) of 19.63% are very high for any field, meaning management is using investor money well to create earnings.
- Move to Steady Cash Flow: A significant note in the fundamental examination is that ACADIA reached positive earnings and operating cash flow in the last year, an important step for a growing biotech company after periods of spending.
For a value investor, these earnings measures indicate the company is not only a speculative idea but a business creating actual economic returns, which should finally be seen in its stock price.
Expansion: The Reason for Reassessment
Last, expansion is the reason that can reduce the distance between market price and inherent value. ACADIA's Expansion Score of 4 displays forceful recent movement with high future predictions.
- High Revenue Increase: Over the past year, revenue jumped by 121.75%, pushed by the effective sale of its main products, NUPLAZID and DAYBUE.
- Good Earnings Increase Forecast: As mentioned, the central prediction is for nearly 40% yearly EPS increase in the next few years. This expected expansion is key to the valuation case, as it gives a clear way for the company to match its current multiples.
This expansion picture handles a usual issue in value investing, the "value trap." ACADIA is not a still company trading at a low multiple; it is a quickly growing one trading at a discount compared to its expansion chance and similar companies.
Conclusion
ACADIA Pharmaceuticals shows a situation that matches several ideas of value investing. It seems low-priced within its high-expansion field, has a very secure, debt-free balance sheet that gives a margin of safety, and has recently become profitable with field-leading margins. Most significantly, it joins these features with high revenue increase and a good earnings view, supplying the reason for a possible market reassessment.
The company's complete fundamental examination report, which lists all the measures behind these scores, can be seen here.
For investors wanting to use this "Decent Value" method to find similar possibilities, you can view the pre-set screen and its present outcomes here.
Disclaimer: This article is for information only and is not financial guidance, a suggestion, or an offer to buy or sell any security. The examination uses data and scores from ChartMill. Investing has risk, including the possible loss of original investment. You should do your own complete research and think about talking with a qualified financial advisor before making any investment choices.
