Gathering New Information about Stocks, Health, and Sports

Introduction

Genentech, Inc (DNA) is an $84.40 billion company in the biotechnology & drug industry. Market capitalization competitors in this industry include Gilead Sciences, Amgen, and Celgene. The biotechnology & drug industry is down 3.22% over the past year compared to the S&P 500 which is down 7.25% during the same period. Over the past month, the industry has been down 2.08%, while the S&P 500 has been down 3.93%. After a strong sell-off earlier in the past month, there is a strong potential for biotechnology & drug companies to grow. Evidence comes from a potential turnaround in equities. As other asset groups have become overvalued, money may now come into equity assets, especially safer industries like biotechnology. Genentech’s growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what Genentech produces. According to Reuters, Genentech “is a biotechnology company that discovers, develops, manufactures and commercializes pharmaceutical products to treat patients with unmet medical needs.” There are several products Genentech produces and sells both under its own identity or buy other companies. If sold by other companies, Genentech receives royalties on these goods. Moreover, as the world population continues to age, there is the potential for biotechnological and drug companies to profit. More individuals will be in need of goods related to health and Genentech has the capacity in its industry to meet this new demand. Therefore the business model is great for the future.

The products Genentech produces can be separated into marketable and license products. Some of the marketable products include Avastin, Rituxan, and Xolair. Avastin is used to aid patients who suffer metastatic colon or rectum cancer. Rituxan is used to help individuals with certain types of arthritis, and Xolar is used to aid individuals who suffer from asthma. Some of the licensed products include Trastuzumab and Daclizumab. Like mentioned in the above paragraph, these products are sold to customers and provide royalty revenues to Genentech.

Growth

Genentech has illustrated solid growth prospects over the past year. According to Reuters, Genentech reported an $11.7 billion revenue product last year. This number is over 26.28% higher than it was the previous year. Compared to the industry’s average of 22.70%, Genentech illustrates its capability to perform above average throughout most economic conditions. Moreover, Genentech’s earnings growth at 31.51% is respectable to the industry’s average of 33.67%. And this statistic coincides with Genentech’s strong history of earnings. This argument is supported with Genentech’s five year average earnings figure of 111.77%--a number more than double of industry average metrics. A five year revenue average of 35.32% is also much better than the industry five year average of 31.65%. Moreover, Genentech’s current earnings report beat out competitors like Amgen (12.79 %) as well.

Moreover, Genentech has kept its costs under control. According to Reuters, Genentech has reported gross, operating, and net profit margins of 83.36%, 36.07%, and 23.62% respectively over the past year. Moreover, these numbers are above the company’s five year averages of 83.01%, 31.57%, and 21.25%. This comparison illustrates a history of strong cost controls. The current averages are also better (business model respected) than the industry’s respective gross, operating, and net income averages of 69.98% 20.78% and 13.88%. Therefore, Genentech has proved to be a solid company in this industry. Its services are well-controlled cost wise, especially to direct market-cap competitors. Amgen reported respective gross, operating, and net income margins last year of 82.75%, 26.94% and 21.43%. Celgene only reported operating margins of 30.24% and net income margins of 6.11%. Therefore, Genentech is not only growing very well, but keeping its costs contained.

Compiling all this information together and investors comes across ROE. Over the past year, Genentech reported an ROE of 25.90%. Therefore, out of all shareholder equity, more than 26% come from earnings instead of debt or stock. This number is great to the industry average of 13.66% and competitor averages of 17.19% (Amgen) and 9.40% (Celgene). Not to mention, Genentech’s current year ROE is also better than the company’s five year average of 19.44%. Therefore, Genentech has a history of strong earnings per its equity share—which reflects the strong capital gain movement over the past year. And if history is any indication, there should be no reason why Genentech cannot continue its success. The same logic applies to Genentech’s 16.39% ROA (above industry average) and 19.88% ROI (above industry average).

Valuation

With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not strictly the case. It is true that Genentech has a forward P/E ratio of 23.87 and a forward price to sales ratio of 6.69 compared to the industry’s respective 28.39 and 7.53, but there is an even different picture to consider. In comparison, market-cap competitor Gilead has higher figures of 26.41 and 9.69. Celgene also has higher numbers at 40.26 and 12.88. What makes these remarks even more enticing is these firms that aren’t growing so greatly but have higher multiples. That idea shows overvaluation, not the mainframe that Genentech is currently in. Moreover, Genentech has a low PEG ratio (1.07) compared to other competitors’ numbers (Gilead: 1.47, Amgen: 0.97, and Celgene: 0.94).

Efficiency

Genentech is efficient. Inventory turnover at 1.18 is strong compared to other industry market-cap rivals (Amgen: 1.28). Moreover, asset turnover is also strong at 0.69 compared to competitor figures. Receivables turnover also illustrates a number of 5.50, illustrating cash received every 66 days. In terms of liquidation, Genentech’s current ratio is 2.23. This number is a good mix of both equity and debt. The company’s capital expenditures have increased (24.79%), which means further increases in capacity and economies of scale may be present in the future, because of this financing. Moreover, institutions own 39.20% of all Genentech shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability.

Technical Analysis

Genentech performed poorly in the past year. The company’s share price has decreased 2.93% year-to-year. This type of growth is correlated for a recessionary-type economy, especially considering the fact that other technology companies have performed far worse. There seems to be some support at the 68 dollar share price range dating back to earlier January 2008. The last time Genentech reached this amount the company rebounded and appreciated 15%. There is a possibility a similar or better situation could occur in the future.

More specific to the current month, Genentech illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 44.75, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Genentech according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

Genentech is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
March 28th, 2008