Is This Stock A Value Trap?

Sherrie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Spectrum Pharmaceuticals (NASDAQ: SPPI) got crushed with a downgrade from Credit Suisse that led to a 6.3% loss on Monday. The stock is now trading at $7.50, 33% lower than it began the year (at $12). But what many don’t realize is that Spectrum at $7.50 is actually more expensive than it was at $12.00

This Is Not A Cheap Stock

Back in March, Spectrum lowered guidance. The company said that it’s expecting full-year revenue of $170 million (average), significantly lower than the $300 million it had projected for the full-year prior to March.

Lately, there has been a lot of people claiming that Spectrum is a value investment. They point to the stock’s P/E ratio of 10.5 or its near-$200 million in cash and believe it is a good investment. However, these people are not quite adding the company’s guidance into their assessment.

Back when Spectrum was at $12, the company was being valued after producing $94.55 million in net income during 2012. Now, after updated guidance, most anticipate an annual loss, much like what we saw during its most recent quarter.

As a result, the pure price of Spectrum Pharmaceuticals might be a bit misleading, as it’s actually more expensive today versus in January. To paint a clearer picture, let’s compare the two periods: one being its price and guidance in January and the other being the stock as it trades today.

<table> <thead> <tr><th> </th><th> <p><strong>January</strong></p> </th><th> <p><strong>June 24</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Stock Price</p> </td> <td> <p>$12</p> </td> <td> <p>$7.50</p> </td> </tr> <tr> <td> <p>Market Capitalization</p> </td> <td> <p>$710 million</p> </td> <td> <p>$450 million</p> </td> </tr> <tr> <td> <p>Full-Year Revenue Guidance</p> </td> <td> <p>$300 million</p> </td> <td> <p>$170 million</p> </td> </tr> <tr> <td> <p>Price/ Sales Guidance</p> </td> <td> <p>2.36</p> </td> <td> <p>2.64</p> </td> </tr> <tr> <td> <p>Forward P/E Ratio</p> </td> <td> <p>14.26</p> </td> <td> <p>47.12</p> </td> </tr> </tbody> </table>

The chart above should be very telling: it shows that while Spectrum Pharmaceuticals is actually cheaper today in stock price, it is not presenting more value. In January, the stock was being valued based on past earnings and future expectations, as most analysts projected net income over $50 million for this upcoming year.

Today, analysts expect net income of under $10 million, and to many this is still too favorable. Moreover, using guidance as a measure, the stock actually traded at a cheaper market capitalization times guidance in January than it does today. Combined, this all proves that at $12, in January, Spectrum Pharmaceuticals was cheaper than it is today.

Don’t Be Tricked

Looking at Spectrum Pharmaceuticals, I don’t see a great deal of value in its stock. Furthermore, there are a lot of questions surrounding its future, due to sales of Fusilev still lagging. Therefore, I would not invest in Spectrum Pharmaceuticals at this time.

 I much prefer a company such as Regeneron Pharmaceuticals (NASDAQ: REGN), an Orphan company with many years of exclusivity for its best-selling drug EYLEA. For Spectrum Pharmaceuticals investors, this should be especially important, considering it was generic introductions that led to Spectrum’s decline.

Regeneron trades at 13 times its last 12 month’s sales. This is far greater than what we see with Spectrum Pharmaceuticals. But like I explained, expectations and growth must be considered.

Regeneron Pharmaceuticals is a company with top-line growth of 80% that has a large pipeline of several blockbuster products. Therefore, the market gives companies with greater growth and more upside higher valuations compared to their fundamentals.

Indirectly, this further adds to the bearish outlook for Spectrum Pharmaceuticals’ stock. Today, it trades at a greater price to guidance ratio than it did in January. Yet, in January the company was projecting growth and higher profitability. To me, the logic of Spectrum being cheap doesn’t make sense, and this information is proof that price is what dictates this opinion.

Conclusion

For those who are considering an investment in Spectrum -- because you believe it is cheap -- you might want to look at the bigger picture. Spectrum Pharmaceuticals is a company that is posting year-over-year revenue losses, is borderline profitable, and has an unstable future due to new generics. Therefore, how and why would it trade at a greater premium to guidance versus times in the past when the company was actually growing? It doesn’t make sense, and this leads me to believe that more downside could occur, and that any notions of value could be a trap.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Sherrie Stone has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus