For investors looking for growth without excessive cost, the "Growth at a Reasonable Price" (GARP) method presents a solid middle path. It tries to find companies with good and lasting growth prospects, but whose stock prices are not at the extreme levels often seen with high-growth stocks. This method mixes the search for price increases with a focus on cost, trying to sidestep the problems of both low-growth value stocks and costly growth stocks. One method for using this strategy is an "Affordable Growth" filter, which selects for stocks with high growth scores, good earnings and financial strength, and a stock price that is not excessive. A recent stock found by this filter is Vericel Corp (NASDAQ:VCEL).
Growth Profile: Strong Momentum and Promising Outlook
The central idea of any GARP strategy is, expectedly, growth. Vericel’s fundamental report points to a good growth profile that supports its place in an affordable growth filter. The company is showing important momentum in its main financial measures.
- Earnings Expansion: The company's Earnings Per Share (EPS) rose by a notable 300% over the past year. While the five-year average is lower, the recent speed is significant.
- Revenue Trajectory: Revenue growth is steadily good, growing 14.05% in the last year and averaging 15.01% each year over the past several years. This shows a healthy, increasing market for its advanced cellular therapies.
- Future Expectations: Possibly most important for growth investors, analyst forecasts indicate ongoing good expansion. EPS is estimated to grow by over 60% each year in the near future, with revenue predicted to rise almost 18% per year on average.
This mix of good past results and even better expected growth creates the basis for viewing VCEL as a growth option. The filter's need for a high growth score is clearly satisfied here.
Valuation Assessment: Reasonable Within a High-Growth Sector
The "affordable" or "reasonable price" part involves valuation. This is where many pure growth methods can fail, by overlooking very high multiples. Vericel’s valuation shows a detailed picture that, when viewed in context, fits the GARP idea.
While standard measures like a Price/Earnings (P/E) ratio of 153.92 or a Forward P/E of 63.54 seem costly in simple terms and versus the wider S&P 500, the view shifts within its industry setting. The biotechnology field is known for high growth forecasts and, therefore, higher valuations.
- Industry Comparison: Vericel’s P/E and Forward P/E ratios are lower than about 89% of its biotechnology industry competitors. This relative valuation is a main filter point.
- Cash Flow and EBITDA: The valuation view improves when examining other measures. The company’s Enterprise Value to EBITDA and Price to Free Cash Flow ratios are also more favorable than over 90% of the industry, implying the market may not completely value its cash-producing capacity.
- Growth Compensation: The filter looks for stocks that are "not overvalued." Considering Vericel’s outstanding estimated earnings growth rate of over 74%, a higher earnings multiple can be acceptable. The review states that a higher valuation could be acceptable because of these growth expectations, which is exactly the mix a GARP investor wants—paying more for growth, but not a limitless amount.
You can review the complete details of these measures in Vericel’s fundamental analysis report.
Supporting Fundamentals: Profitability and Financial Health
A lasting growth narrative needs more than just revenue increase; it requires a profitable operation and a firm balance sheet to support future plans. The affordable growth filter also selects for acceptable scores in these areas, which Vericel meets.
Profitability is a definite positive. The company has margins that place it with the better performers in its industry:
- A Profit Margin of 5.06% and an Operating Margin of 2.75% both exceed about 89% of biotech competitors.
- Its Return on Assets (2.89%) and Return on Equity (4.06%) are also in the higher range of the industry, showing effective use of capital.
Financial Health is sufficient, with a score that shows small issues balanced by clear positives. The company has no debt, which is a major benefit, and has very good liquidity with a Current Ratio of 4.87. Its Altman-Z score of 8.38 indicates a very small chance of near-term bankruptcy risk. The mentioned issues mainly involve share dilution over time and a Return on Invested Capital that is presently below its cost of capital. However, the overall health view supports the ability for continued growth.
Conclusion
Vericel Corp shows the kind of company an "Affordable Growth" or GARP filter intends to find. It has the necessary element of good, speeding growth—both achieved and expected—in the active area of advanced biologics. Importantly, this growth possibility is not matched with an extremely high valuation compared to its own high-growth field, meeting the filter's "reasonable price" requirement. Supported by industry-leading profitability and a basically healthy, debt-free balance sheet, the company seems set to deliver on its growth path. For investors, it shows an example of mixing growth goals with valuation care.
This review used a specific filtering method. If you want to examine other stocks that fit similar standards for growth at a reasonable price, you can find more possible options using the Affordable Growth filter on ChartMill.
Disclaimer: This article is for information only and is not financial advice, a suggestion to buy or sell any security, or a support of any investment method. Investors should do their own research and think about their personal financial situation and risk tolerance before making any investment choices.
