Shares of cystic fibrosis medication developer Vertex Pharmaceuticals Incorporated (VRTX) have been struggling to recover because  the COVID-19 pandemic continues unabated and the sector and investors’ interest is still largely focused on effects of that public health crisis. The stock has declined 12.1% over the past year, and 8.4% year-to-date.

However, the company  reported impressive financials for the year ended December 31, 2020, with double-digit improvement in key financial metrics. Also, VRTX has received FDA approval for two of its drugs over the past month, reflecting its strong operational performance over this period. As a result, analysts expect the company’s revenue and earnings to increase in the coming quarters.

Given the favorable revenue and earnings outlook, we think the company’s current price levels indicate that it is a relatively undervalued stock.

Here’s what could drive VRTX’s performance in 2021:

Potential Increase in Demand

On January 29, , VRTX’s investigational drug IND for type 1 diabetes treatment received FDA clearance to pursue clinical trials. In addition, VRTX partnered with Skyhawk to modulate RNA splicing for serious diseases in  December. This will allow  the company to diversify its product pipeline, creating more revenue sources.

Also last month,  VTRX’s Trikafta received FDA approval to treat children in the  6-11 age group for cystic fibrosis. The drug was approved by the European Commission in November. The company is currently working on several other drugs aimed at treating and/or curing cystic fibrosis.

With federal support backed by impressive clinical trials, VRTX should receive a steady flow of orders from the United States and European Union given the gravity of cystic fibrosis. Moreover, with VRTX taking active steps to expand its drug pipeline, the company should witness a significant rise in revenues soon.

Relative Undervaluation

In terms of non-GAAP forward p/e, VRTX is currently trading at 19.29x, 20.7% lower than the category average  24.34x. The company’s non-GAAP forward PEG of 1.33x is 39.2% lower than the industry average  2.19x.

Also, VTRX’s forward price/sales and price/cash flow ratios of 8.10 and 16.29, respectively, compare favorably with the respective industry averages.

Impressive Growth History and Future Estimates

VRTX’s revenues increased at a CAGR of 35.6% over the past three years. The company’s net income and EPS increased at CAGRs of 117.5% and 114.7%, respectively, over this period. Its levered free cash increased at a CAGR of 68.1% over the past three years, while its total assets rose at a CAGR of 49.1% over the same time.

Analysts expect VRTX’s EPS to rise 9.5% in the current year, 14.7% next year, and a rate of 18.3% per annum over the next five years. A consensus revenue estimate represents a 9.6% increase year-over-year in the fiscal first quarter (ending March 2021), 11.9% in fiscal 2021, and 11.6% next year.

Consensus Rating and Price Target Indicate Potential Upside

VRTX has gained nearly 10% since hitting its 52-week low of $197.47 in March last year. Analysts expect VRTX to hit $283.50 soon, indicating a potential upside of 31.9%.

The stock has an average broker rating of 1.44, reflecting favorable analyst sentiment. Of 27 Wall Street analysts that rated the stock, eight rated it Strong Buy and 14 rated in Buy.

Favorable POWR Ratings

VRTX has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.

VRTX  has an A  grade for Value and Quality, which is justified given its stable financials and discounted valuation. The company’s trailing-12-month gross profit margin of 58.65% is 4.9% higher than the industry average  55.91%. Also, its trailing-12-month EBIT margin of 46.24% is significantly higher than the industry average 1.16%. And  the company’s ROE, ROA and ROTC margins of 36.71%, 23.07% and 21.89%, respectively, compare favorably with the negative industry averages.

Of 487 stocks in the Biotech industry, VRTC is currently ranked #18. You can check out VRTX’s additional ratings for Growth, Momentum, Stability and Sentiment here.

There are 30 other stocks in the Biotech industry with an overall rating of A or B. Click here to view them.

Bottom Line

As the COVID-19 pandemic gradually subsides, the healthcare sector is expected to resume its focus on developing treatments and therapeutics for life threatening ailments. Hence, we think VRTX has plenty of upside in the coming months.

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VRTX shares were trading at $217.53 per share on Wednesday afternoon, up $1.09 (+0.50%). Year-to-date, VRTX has declined -7.96%, versus a 4.71% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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