Incyte trades at $67 per share and has moved almost in lockstep with the market over the last six months. The stock has lost 6.6% while the S&P 500 is down 2.1%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Incyte, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Incyte Not Exciting?
Despite the more favorable entry price, we're cautious about Incyte. Here are three reasons why INCY doesn't excite us and a stock we'd rather own.
1. Shrinking Adjusted Operating Margin
Adjusted operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D. It also removes various one-time costs to paint a better picture of normalized profits.
Looking at the trend in its profitability, Incyte’s adjusted operating margin decreased by 15.2 percentage points over the last five 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 12.2%.
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Incyte’s margin dropped by 13.5 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Incyte’s free cash flow margin for the trailing 12 months was 7.6%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Incyte’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Incyte isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 11× forward P/E (or $67 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
Stocks We Like More Than Incyte
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