Investors looking to assemble a lasting portfolio of good companies at fair prices frequently use the ideas of famous fund manager Peter Lynch. His method, explained in his book One Up on Wall Street, centers on finding expanding companies with sound financial condition and durable business models, but importantly, without spending too much for that expansion. This "growth at a reasonable price" (GARP) method prioritizes fundamental study over predicting market movements, looking for companies with a history of earnings, controlled debt, and a price that does not exaggerate their future potential. A filter using Lynch's main standards lately highlighted GENMAB A/S -SP ADR (NASDAQ:GMAB) as a possible fit for this method.
Looking at Expansion and Price
Central to the Lynch method is the mix between expansion and cost. The approach searches for companies with steady, but not extreme, earnings expansion, combined with a price measure that accounts for that expansion.
- Durable Earnings Expansion: Lynch preferred companies with a 5-year earnings per share (EPS) expansion rate between 15% and 30%, thinking expansion outside this band was often not maintainable. GENMAB shows good results here, with a 5-year EPS expansion rate of 28.38%. This puts the company well inside Lynch's desired range, pointing to a solid and steady expansion path.
- The Important PEG Ratio: To make sure the stock cost is not too high, Lynch used the Price/Earnings to Growth (PEG) ratio, aiming for a value of 1 or lower. A PEG under 1 implies the market could be pricing the company's expansion too low. GENMAB's PEG ratio, using its last 5-year expansion, is 0.49. This is a notable number, suggesting that compared to its past earnings expansion, the stock seems to be trading at a large markdown.
Checking Financial Condition and Earnings
Lynch required that an expanding company must also be financially secure. He used checks to confirm a company was not carrying too much debt and was producing good returns on shareholder equity.
- Cautious Balance Sheet: A low Debt-to-Equity (D/E) ratio was critical for Lynch, who liked companies financed more by equity than debt. GENMAB's D/E ratio of 0.02 is very low, showing little debt use and a very strong balance sheet. This gives notable steadiness and options, matching well with Lynch's interest in lasting businesses.
- Good Earnings: The Return on Equity (ROE) shows how well a company produces earnings from shareholder money. Lynch wanted an ROE above 15%. GENMAB's ROE of 25.76% is much higher than this level, indicating very capable management and a strong earnings-producing business model.
- Liquidity Test: The Current Ratio, which checks a company's ability to meet near-term bills, must be at least 1. GENMAB's ratio of 6.03 shows plenty of liquidity, further highlighting its financial might and low business risk.
A Broad Fundamental Look
A check of GENMAB's detailed fundamental report supports the results from the Lynch filter. The report gives the biotechnology company a good total score of 7 out of 10, with specific high points in condition and earnings.
- Earnings & Condition: The company gets high marks in these groups. Its margins (Profit Margin of 41.35%, Operating Margin of 36.85%) are with the best in the biotechnology field. Financially, it shows no liquidity or debt worries, backed by its very small debt and high Altman-Z score.
- Price Setting: The price rating is blended but turns favorable. While the forward P/E ratio seems high, standard measures like P/E and Price/Free Cash Flow show GENMAB to be less expensive than most of its field competitors. When seen alongside its past expansion (using the PEG ratio), the price case gains weight.
- Expansion Path: The expansion rating is good, noting notable past expansion in both EPS and Revenue. Experts think expansion will persist, though at a slower rate, which fits Lynch's liking for maintainable, not sudden, increase.
Is GENMAB a Lynch-Method Investment?
For an investor using Peter Lynch's ideas, GENMAB makes a strong argument. It shows the main traits Lynch valued: superior and maintainable past earnings expansion, first-class earnings, a very strong balance sheet with almost no debt, and a price that seems fair when its expansion rate is considered. The company's work on creating antibody treatments for cancer and other illnesses is a detailed area, but its financial performance is clear and solid, a trait Lynch liked.
While the Lynch filter gives a useful beginning for finding options, it is just the initial phase. The method stresses the value of personal study to learn the business "narrative." Investors would need to examine GENMAB's development portfolio, work with companies like Johnson & Johnson, and competitive field to judge its long-term possibilities completely.
Interested in seeing other companies that meet the Peter Lynch filter? You can find the present list and use the filter yourself here.
Disclaimer: This article is for information only and does not make up financial guidance, a suggestion to buy or sell any security, or a support of any investment method. Investors should do their own study and talk with a qualified financial advisor before making any investment choices.
