BioMarin Pharmaceutical trades at $59.99 per share and has stayed right on track with the overall market, gaining 6.5% over the last six months. At the same time, the S&P 500 has returned 11.4%.
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Why Is BioMarin Pharmaceutical Not Exciting?
We’re sitting this one out for now. Here are two reasons why there are better opportunities than BMRN, plus one stock we’d rather own.
1. Adjusted Operating Margin in Limbo
Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.
Analyzing the trend in its profitability, BioMarin Pharmaceutical’s adjusted operating margin might have fluctuated slightly but has generally stayed the same over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 20.2%.
2. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
BioMarin Pharmaceutical historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 2.7%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.
Final Judgment
BioMarin Pharmaceutical isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 10.5× forward P/E (or $59.99 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re fairly confident there are better investments elsewhere. Let us point you toward the Amazon and PayPal of Latin America.
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