– By GF Value
The stock of Abiomed (NAS:ABMD, 30-year Financials) is believed to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $320.62 per share and the market cap of $14.5 billion, Abiomed stock is believed to be fairly valued. GF Value for Abiomed is shown in the chart below.
Because Abiomed is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 22.6% over the past five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Abiomed has a cash-to-debt ratio of 10000.00, which is better than 100% of the companies in the industry of Medical Devices & Instruments. GuruFocus ranks the overall financial strength of Abiomed at 9 out of 10, which indicates that the financial strength of Abiomed is strong. This is the debt and cash of Abiomed over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Abiomed has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $812.9 million and earnings of $4.39 a share. Its operating margin of 27.65% better than 89% of the companies in the industry of Medical Devices & Instruments. Overall, GuruFocus ranks Abiomed’s profitability as strong. This is the revenue and net income of Abiomed over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Abiomed is 22.6%, which ranks better than 82% of the companies in the industry of Medical Devices & Instruments. The 3-year average EBITDA growth rate is 39.7%, which ranks better than 82% of the companies in the industry of Medical Devices & Instruments.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Abiomed’s ROIC is 23.38 while its WACC came in at 9.66. The historical ROIC vs WACC comparison of Abiomed is shown below:
In conclusion, the stock of Abiomed (NAS:ABMD, 30-year Financials) gives every indication of being fairly valued. The company’s financial condition is strong and its profitability is strong. Its growth ranks better than 82% of the companies in the industry of Medical Devices & Instruments. To learn more about Abiomed stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.