No need to introduce Roche in detail, a Basel-based pharmaceutical giant with nearly 100,000 employees worldwide. It has been active since 1896 and is among the leaders in its sector. It is the world leader in cancer and virology drugs.
Valuation & dividend
Like all large caps currently, Roche is trading at a very high price relative to its fundamentals:
- 21.6 times current recurring earnings
- 28.4 times average recurring earnings
- 24.4 times (!) tangible assets
- 8.9 times book value
- 4.7 times sales
- 16.6 times current free cash flow
- 22.18 times the average free cash flow
Let us also note that the enterprise value represents 17.2 times the current FCF and 23 times the average FCF. The EBIT only amounts to 5.8% of the EV and the EBITDA to 5.9%.
The dividend is quite correct in the current times, with a yield of 2.6%. This is also quite well covered by the results, since it represents:
- 57% of current profit
- 75% of average profit
- 44% of current free cash flow
- 59% of average free cash flow
The dividend has been growing slowly but surely every year, at an annual rate of 2.1% (last five years).
Balance sheet & result
Just like the dividend, the value of assets, cash reserves and the profit of the Basel giant are progressing over the long term, which proves the solidity of its business model. Liquidity is correct, with a current ratio of 1.3 (down) and a quick ratio of 1.04. The gross margin is quite impressive, with 71% (up). It translates in an equally remarkable way into the net margin, with 22% and even better in terms of the free cash flow margin, with 28%. Similarly, profitability is excellent, with an ROA of 16% (up), an even higher CFROA, at 27% and an ROE of a whopping 41%. We can say that on the Rhine side, we don't do things by halves.
Long-term debt still represents 16% of assets, but this ratio is down quite significantly compared to the previous financial year. Total debt also represents only 0.57 times equity. Thanks to the significant free cash flow generated by Roche, it could be repaid in just a year and a half. It should also be noted that debt repayment has represented a positive return for shareholders of 1.7% over the last five years. On the other hand, there is a very slight increase in the number of shares outstanding, representing a negative return for owners of -0.09%. We have to find something to complain about.
Conclusion
Between the dividend, debt repayment and share issuance, the average total return for shareholders has amounted to 4.1% over the last five years, which is very appreciable. The Basel company uses almost all of its free cash flow (90.8%) to achieve this. It is therefore very generous, but to continue to do as well in the future it will be necessary to ensure an FCF that is always as high.
Roche has its overheads under control. Its goodwill is increasing. Debt is under control. Margins are very high, especially FCF, thanks to low capital expenditure. It smells like a franchise and a cash cow... or rather a cash cow!
Volatility is quite low, at 13.8% and beta is almost equal to the market, at 1.02.
Piotroski's score is high, which is hardly surprising, with seven points out of nine. This confirms the solidity of the pharmaceutical giant. Altman's score, with 5.66, puts Roche in the green zone, that is, the one where it is unlikely to go bankrupt, but this was already known.
This is all well and good. Almost too much. Are all these qualities worth paying nearly 25 times the tangible value of the company? Certainly, the intangible value of a pharma is important, but even taking this into account we arrive at nearly 9 times its entire book value.
Roche is undeniably a very high quality company, but right now it is really overpriced. Or maybe I am missing something. Probably the speculators investing in it are anticipating the explosion of Valium sales following the next stock market crash...
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Excellent company indeed, but much too expensive, especially in relation to the rather slow growth. Pharmas are particularly sought after at the moment because of their defensive profile, which explains the excessive valuations.
The same goes for Novartis and similar smaller companies such as Vifor Pharma, Siegfried, Galenica and Lonza.
Lonza is another meteorite that I advised an old buddy to sell. Everything is hot right now.
By the way, it's Trump's birthday today. I wonder what he's doing...
What holiday? Is it World Simpleton Day?
Exactly! President's Day!
Thank you for this analysis of Roche. I share your conclusions for this company and other players in the sector.
In another area, what do you think of Schindler (registered shares or participation certificates listed on the Swiss stock exchange). The prices have recently fallen against the backdrop of 2019 results below expectations and the coronavirus. But this company seems to me to be of quality and interesting - in these times - for a long-term investment. What I like is that the business of this company is not only to sell elevators and other escalators, but also and above all to maintain this sensitive equipment, which provides a regular income.
This is a company that I followed closely at the time. It is also of very high quality and as you point out it can rely on this very appreciable "captive customer" side, which ensures it regular income. It thus has many qualities specific to franchises (in particular well-controlled overheads, increasing goodwill, low debt and low capital expenditures as well, which is quite surprising for a company of this type). There is a good return to the shareholder in the form of dividends and debt repayment (4.4% per year in total). That being said, I also find it expensive. Not as much as Roche, but too expensive all the same.
I analyzed Schindler in 2018 and I still come to the same conclusion: absolutely top company but I will try not to pay more than 200 bucks.
https://www.dividendes.ch/2018/04/analyse-de-schindler-schnswx/
Hello everyone,
As already commented, Roche Holding AG stock is a portfolio fund value that should be purchased on a strong pullback in a "Buy and hold" strategy.
The same is true for Nestlé and Novartis, which represent two thirds of the SMI index, which are defensive stocks and fall into the category of dividend aristocrats.
This is why in a turbulent market these values are sought after to stabilize portfolios, hence the current strong demand.
Good day to all
Hello, in the genre of high dividend grandpa action, what do you think of Shell? https://www.google.com/search?q=AMS:RDSA&tbm=fin#scso=_3uhcXsXPJommaKrQo-AL1:0
It got properly screwed by the coronavirus, it's an oil company with a dividend that hasn't changed for years and which therefore has a very low share price at 8 or 9%
And the demand for oil is not going to disappear by tomorrow... even if the Chinese are going to take time to get everything going again, I have no doubt that the price of Brent and therefore of Shell will rise again in the fairly near future.
It stinks of dividend trap!
The dividend exceeds the current/average FCF and is also very close to breaking with respect to current/average earnings. With the passage of Corona, the dividend is therefore likely to suffer…
The stock is expensive despite what the dividend yield suggests (compared to current and especially average profits, the same compared to FCF, and it's worse if we look at it compared to the enterprise value).
And then to finish, it's a knife that falls! Let's let the storm pass and we'll see afterwards...
When you say price to enterprise value, are you talking about book value? In the case of Shell, how do you calculate this ratio?
and for the price/cash flow ratio per share I get about 4: (share price (20€) / FCF per share (5)
for me it's a good value for this ratio right?
Oh yes, I took the title in NY which changes the situation indeed, my bad. These titles listed on two different markets with prices that do not correspond and currencies that differ from those of the consolidated results is a real mess!
So yes, it is better indeed, it changes the problem of valuation, but not that of the dividend which is threatened and the price in free fall.
Oh yes I was talking about the Euronext Amsterdam listing
for the dividend there is indeed this risk given the fall in the price, but I know this stock well because I have been in it for about ten years and the dividend has never fallen (rather increased even) despite 2 falls in the price resembling the one that is happening at the moment (in 2007 and 2016)
well after the past does not presume the future of course 🙂 but I find that this kind of momentum is rare enough to note it ^^
The fall in the price does not worry me for the dividend. For the latter, it is rather the fact that the profit or the fcf are almost entirely used to pay it. I do not know how the situation was in 2007. Maybe there was more margin. Maybe also they issued shares or contracted debt to pay dividends… It is stupid but it happens…
In short. If the price drop is a problem for me, it's not for that but precisely because the momentum is rotten. As you say, it's rare. Sometimes it goes back up very strongly for a moment like in 1987 or 2018 (I'm talking about the market as a whole). But sometimes it's the start of a much bigger drop like in 2000 and 2008. If the market wasn't so high I would be less careful, but here on the other hand it encourages caution.
well here it is…