Versartis, Inc. (NASDAQ:VSAR) shares are down more than -86.41% this year and recently increased 9.43% or $0.19 to settle at $2.22. Lannett Company, Inc. (NYSE:LCI), on the other hand, is up 32.65% year to date as of 12/05/2017. It currently trades at $28.75 and has returned 9.76% during the past week.
Versartis, Inc. (NASDAQ:VSAR) and Lannett Company, Inc. (NYSE:LCI) are the two most active stocks in the Drugs – Generic industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Comparatively, LCI is expected to grow at a -3.27% annual rate. All else equal, VSAR’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. EBITDA margin of 34.72% for Lannett Company, Inc. (LCI).
Cash is king when it comes to investing. VSAR’s free cash flow (“FCF”) per share for the trailing twelve months was -0.70. Comparatively, LCI’s free cash flow per share was -0.36.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. VSAR has a current ratio of 1.50 compared to 2.50 for LCI. This means that LCI can more easily cover its most immediate liabilities over the next twelve months. VSAR’s debt-to-equity ratio is 0.11 versus a D/E of 1.55 for LCI. LCI is therefore the more solvent of the two companies, and has lower financial risk.
VSAR trades at a P/B of 1.47, compared to a forward P/E of 10.43, a P/B of 1.88, and a P/S of 1.72 for LCI. VSAR is the cheaper of the two stocks on an earnings, book value and sales basis. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. VSAR is currently priced at a -48.25% to its one-year price target of 4.29. Comparatively, LCI is 10.24% relative to its price target of 26.08. This suggests that VSAR 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 VSAR and 2.40 for LCI, which implies that analysts are more bullish on the outlook for VSAR.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. VSAR has a beta of 2.33 and LCI’s beta is 2.80. VSAR’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.VSAR has a short ratio of 1.10 compared to a short interest of 18.61 for LCI. This implies that the market is currently less bearish on the outlook for VSAR.
Versartis, Inc. (NASDAQ:VSAR) beats Lannett Company, Inc. (NYSE:LCI) on a total of 8 of the 13 factors compared between the two stocks. VSAR is growing fastly and has lower financial risk. In terms of valuation, VSAR is the cheaper of the two stocks on an earnings, book value and sales basis, VSAR is more undervalued relative to its price target. Finally, VSAR has better sentiment signals based on short interest.