Polydex Pharma is trading at 1/10 the industry average offering a huge bargain with positive earnings. Over the past many years earnings have been positive and increasing. And, yet, the stock is trading at a single-digit EPS ratio. Whereas the industry average is 65-times earnings, this pharmaceutical company is trading at 6-times earnings. This is a tremendous opportunity.
What is the right price you would pay to acquire a share of Polydex Pharmaceuticals? For most investors, it would be the price that gives them a wide margin of safety to have minimal downside risk. In other words, most investors are always looking for undervalued stocks. Even if the
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How important is Polydex Pharmaceuticals's Liquidity
Polydex Pharmaceuticals
financial leverage refers to using borrowed capital as a funding source to finance Polydex Pharmaceuticals ongoing operations. It is usually used to expand the firm's asset base and generate returns on borrowed capital. Polydex Pharmaceuticals financial leverage is typically calculated by taking the company's all interest-bearing debt and dividing it by total capital. So the higher the debt-to-capital ratio (i.e., financial leverage), the riskier the company. Financial leverage can amplify the potential profits to Polydex Pharmaceuticals' owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if the firm cannot cover its debt costs. The degree of Polydex Pharmaceuticals' financial leverage can be measured in several ways, including by ratios such as the debt-to-equity ratio (total debt / total equity), equity multiplier (total assets / total equity), or the debt ratio (total debt / total assets). Please check the
breakdown between Polydex Pharmaceuticals's total debt and its cash.
Details
Polydex Pharmaceuticals is mostly a veterinary pharmaceutical company. The develop, manufacture and distribute their products worldwide. They are a smaller company with a market capitalization of only $6.2 million. Their share price is $1.70 per share.
The pet industry is a $15 billion per year sector. Of that, there is a large percentage that goes towards health care from either veterinary visits and treatments. Americans, and more increasingly the rest of the world, spend a considerable amount of money on their pets.
Earnings-per-share gives a strong indication of what a company will be earning in the future, although this is not a certainty; it is only an indication. If earnings-per-share are increasing over a given period, say five years, then the indication is that the company will continue to increase their earnings in the next year.
In the case of POLXF, their earnings have been increasing over the latest few years, as this listing shows:
2012: -$0.13
2013: $0.22
2014: $0.20
2015: $0.50
The first thing you might see is that earnings for the previously complete year are on $0.50 in 2015. Earnings are slated to rise above that for 2016. But, how much does it cost to “earn” that next year’s earnings? As mentioned above, only $1.70 per share. Given all the variables, if the share price remained exactly the same while simultaneously the earnings remained the same, you would “earn” 29% for the year. I am having a difficult time locating a better return on an annual basis than that. That is an astronomically high earnings ratio.
The industry average is where I look to next to determine where this stock should be in relation to they earnings potential. POLXF is trading at 6.83 times earnings. The industry and sector averages, respectively, are trading at 64.14 times and 63.11 times earnings. This stock is trading at 1/10th the industry average despite positive earnings and increasing earnings growth.
Given the EPS ratio, if the company were to be trading at 1/2 the industry average, 30-times EPS, the stock would be trading at $15.00 per share, a nearly 1,000 percent return. Keep in mind that only gets the stock up to half the industry average.
Another key variable that I find compelling about this company is its Inventory Turnover Ratio. It leads the industry 3.79 versus 2.70. It sells more of its inventory at a higher pace and a higher margin ratio. This shows how effective management is at its job of returning value to investors. And, yet, the stock is priced so low.
Another point I wanted to show was the gross profit margin versus the industry. POLXF earns slightly more than double the industry average, 22.8 percent versus 11.5 percent, respectively. The company not only sells its inventory at a faster rate it also earns more in margins per sale.
The economy itself is expanding throughout the world. This will give POLXF the opportunity to expand its sales and continue to grow as a company. The overall stock market is trading at 25 times earnings on average. At some point, investors are going to start looking for increased value from earnings potential. A company like POLXF is exactly that opportunity. There is so much potential value in a stock priced so discounted to the industry and its own earnings.
There are very few bargains in the market at this point. However, POLXF is far more than a bargain. This is a bargain that is beyond difficult to pass. Add this stock to your portfolio and hold this for a very long period. You will be glad you did.
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David Taylor is a Senior Member of Macroaxis Editorial Board - Sector Analysis. David is a professional writer who writes for multiple investment news outlets. His primary focus is dynamic movements in financial markets and effects of economic volatility on North American industries and sectors. David has many years of experience in financial service industry including working with major banks as a FX trader. In his free time, he does a lot of outdoors type activities including rock climbing, mountain biking, hiking, mountaineering and kayaking in the summer, and snowboarding in the winter.
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