Depomed, Inc. (NASDAQ:DEPO) shares are down more than -56.38% this year and recently increased 1.91% or $0.15 to settle at $8.01. DURECT Corporation (NASDAQ:DRRX), on the other hand, is down -20.90% year to date as of 12/05/2017. It currently trades at $1.01 and has returned -5.36% during the past week.
Depomed, Inc. (NASDAQ:DEPO) and DURECT Corporation (NASDAQ:DRRX) are the two most active stocks in the Drug Manufacturers – Other industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect DEPO to grow earnings at a 25.00% annual rate over the next 5 years. Comparatively, DRRX is expected to grow at a 20.00% annual rate. All else equal, DEPO’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Depomed, Inc. (DEPO) has an EBITDA margin of 31.21%. This suggests that DEPO underlying business is more profitable DEPO’s ROI is -0.60% while DRRX has a ROI of -114.80%. The interpretation is that DEPO’s business generates a higher return on investment than DRRX’s.
If there’s one thing investors care more about than earnings, it’s cash flow. DEPO’s free cash flow (“FCF”) per share for the trailing twelve months was -0.05. Comparatively, DRRX’s free cash flow per share was +0.02. On a percent-of-sales basis, DEPO’s free cash flow was -0% while DRRX converted 0.02% of its revenues into cash flow. This means that, for a given level of sales, DRRX is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. DEPO has a current ratio of 0.80 compared to 1.70 for DRRX. This means that DRRX can more easily cover its most immediate liabilities over the next twelve months. DEPO’s debt-to-equity ratio is 3.19 versus a D/E of 1.99 for DRRX. DEPO is therefore the more solvent of the two companies, and has lower financial risk.
DEPO trades at a forward P/E of 14.75, a P/B of 2.50, and a P/S of 1.21, compared to a P/B of 15.14, and a P/S of 5.16 for DRRX. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. DEPO is currently priced at a -7.18% to its one-year price target of 8.63. Comparatively, DRRX is -48.73% relative to its price target of 1.97. This suggests that DRRX is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.90 for DEPO and 2.70 for DRRX, which implies that analysts are more bullish on the outlook for DEPO.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. DEPO has a beta of 1.22 and DRRX’s beta is 1.67. DEPO’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.DEPO has a short ratio of 6.61 compared to a short interest of 2.11 for DRRX. This implies that the market is currently less bearish on the outlook for DRRX.
DURECT Corporation (NASDAQ:DRRX) beats Depomed, Inc. (NASDAQ:DEPO) on a total of 8 of the 14 factors compared between the two stocks. DRRX is growing fastly, has a higher cash conversion rate, higher liquidity and has lower financial risk. DRRX is more undervalued relative to its price target. Finally, DRRX has better sentiment signals based on short interest.