For investors aiming to construct a portfolio using value investing principles, the central task is finding companies whose present market price is below their calculated intrinsic value. This strategy, established by Benjamin Graham and used by Warren Buffett, demands a methodical review of a company's fundamentals to find possible discounts. A typical method is to filter for stocks that seem inexpensive using important financial ratios while also showing good fundamental business soundness, steady earnings, and acceptable future potential. This pairing helps sidestep the feared "value trap", a stock that is low-priced for a cause, and instead targets good companies that might be briefly out of favor.
UNITED THERAPEUTICS CORP (NASDAQ:UTHR) appears as a prospect from this type of filtering method. The biotechnology company, which works on creating and selling treatments for pulmonary arterial hypertension and other ongoing illnesses, shows a financial picture that justifies more examination from a value-focused viewpoint.
Valuation: A Relative Discount in a Costly Sector
The initial step for a value investor is valuation. The aim is to pay below a company's worth, and important figures like the Price-to-Earnings (P/E) ratio give an early view. United Therapeutics' valuation figures are notable, especially compared to its sector.
- Price-to-Earnings (P/E) Ratio: At 18.34, UTHR's P/E ratio is seen as high by itself. Yet, comparison is key. This number is much lower than the biotechnology sector average P/E of 67.21, doing better than 94.57% of similar companies. It is also lower than the wider S&P 500 average.
- Forward P/E and Cash Flow: The view improves with future-oriented and cash-based metrics. The company's Price/Forward Earnings ratio of 16.34 and its Price/Free Cash Flow ratio are both in the lowest quarter of the sector, signaling the market may not completely account for its future earnings or strong cash production.
For a value investor, these comparative valuations point to a possible safety margin, a gap between the price paid and the company's calculated value. That UTHR trades at a large discount to its sector while not being a risky, moneyless biotech is a persuasive beginning.
Financial Health: A Strong Balance Sheet
A low valuation is unimportant if the company is financially weak. Value investing stresses a sound balance sheet to endure economic declines and prevent failure risk. United Therapeutics does very well here, receiving a nearly ideal Health score of 9 out of 10.
- No Debt and Ample Liquidity: The company has no debt, putting its Debt/Equity ratio with the best in the market. This gives great financial freedom and eliminates interest cost risk.
- Good Solvency and Liquidity: Its Altman-Z score of 19.59 shows very little near-term failure risk and does better than almost 89% of the sector. Also, a Current Ratio of 6.40 and a Quick Ratio of 6.07 show a notable ability to meet immediate debts, well above sector averages.
This excellent financial health is a key part for value investors. It means the company's low valuation is not from financial trouble but could be from other elements, like market feeling or sector changes, making it a more dependable option for long-term price increase.
Profitability: High-Quality Earnings
An undervalued stock turns into a good investment when it is also a high-caliber business. Value investing is not only about buying low-cost stocks; it is about buying excellent companies at a reasonable price. United Therapeutics' profitability metrics are very good, scoring a 9 out of 10.
- Leading Margins: The company has sector-leading margins. Its Profit Margin of 40.65% and Operating Margin of 48.65% do better than 97% and 99.6% of its biotechnology peers, in order. A Gross Margin close to 89% further highlights the pricing strength and efficiency of its commercial products.
- Good Returns on Capital: The company creates substantial value for shareholders, shown by a Return on Invested Capital (ROIC) of 17.33%, which is in the top group of the sector. This shows management is using capital well to produce earnings.
These profitability numbers are important because they verify the company's fundamental strength. A value investor can have more assurance that the business's earnings are stable and of high quality, supporting the idea that the current stock price may not show its true earnings ability.
Growth: A Good Base for What Comes Next
While pure value stocks can lack growth, the best candidate mixes appealing valuation with a maintainable growth path. This makes sure the business is not still and that earnings can increase over time. United Therapeutics displays a reasonable Growth score of 6 out of 10.
- Good Past Performance: Over the last year and on a multi-year average, the company has provided strong growth in both Earnings Per Share (EPS) and Revenue, with EPS increasing almost 17% each year.
- Positive Future Expectations: Analysts forecast continued growth, with EPS and Revenue expected to rise by over 11% yearly in the next few years. While this is a slowdown from past levels, it stays a good growth rate for a profitable, settled company.
This steady growth picture supports the valuation case. It indicates the company is not only a fixed asset trading at a discount but a developing business whose future cash flows could support a higher valuation, offering the chance for a twin gain from both price multiple improvement and earnings increase.
Conclusion and Next Steps
United Therapeutics Corp shows an example of how a company can be both high-caliber and comparatively undervalued. Its very strong balance sheet, outstanding profitability, and good growth prospects differ from a valuation that is heavily discounted relative to its sector peers. This mismatch is exactly what value investing filters try to find: financially sound companies with lasting competitive edges that are trading at a price that may not show their long-term intrinsic value.
Naturally, this review is from a quantitative point-in-time. Possible investors should think about non-quantitative elements like development pipeline progress, regulatory environments, and competition in the pulmonary hypertension market.
Interested in reviewing other stocks that match this "reasonable value" description? You can perform a similar filter using the ChartMill Stock Screener to find more companies with good valuations, health, profitability, and growth.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any securities. The analysis is based on data and scores provided by ChartMill. Investors should perform their own research and consider their personal financial situation before making any investment decisions.
