Roche Holding AG (ROG:SWX) stock: Analysis

The action Rock is listed on the Zurich Stock Exchange under the symbol "ROG". This analysis follows the one carried out in February 2020, a few days before the corona crash.

Roche stock valuation

Thanks to an improvement in fundamentals linked to the health crisis, combined with a concomitant drop in the share price of almost 10%, Roche is currently trading at a slightly more attractive price than last year. We recall that it was indeed really overpriced during our last analysis. The ratios are now as follows:

• price/recurring earnings: 18.62 (current) / 23.54 (average)
• price/book value: 7.32
• price / tangible assets: 17.66
• price / sales: 4.56
• price / free cash flow: 24.86 (current) / 16.83 (average)
• enterprise value / free cash flow: 25.47 (current) / 17.22 (average)
• EBIT / enterprise value: 6.80%
• EBITDA / enterprise value: 6.96%

So there is a slight improvement. However, we are still far from the mark in terms of tangible assets, book value and sales. Let us recall that a price/sales ratio above four is in principle a good sell signal.

Roche stock dividend

The yield is quite interesting in the current times, with 2.9%. In addition, the dividend has a small margin of safety compared to the fundamentals, which should ensure its payment in the future, or even allow a very slight increase. The distributions represent in fact:

• 54.3% of current profit and 68.59% of average profit
• 72,56% of current free cash flow and 49,07% of average free cash flow.

The company has also been increasing its dividend slowly but surely in recent years, at an average annual rate of 2.1%. There is a strong chance that this will continue in the medium term.

Fundamentals

Just like the dividend, the profit, asset value and cash reserves are growing over the long term, which proves the solidity of the Basel pharmaceutical giant's business model. The group was able to hold its own in this last very unusual financial year, managing to increase its profit somewhat compared to the previous year, which was already excellent. Sales of tests for the Chinese virus and the demand for certain drugs such as the anti-inflammatory Actemra, used in the context of this damn pandemic, gave Roche a big helping hand in achieving these good results.

Cash reserves are healthy and virtually identical to the previous year, with a current ratio of 1.3 and a quick ratio of 1.01.

Profitability and profitability

The gross margin is even more impressive than that of the previous financial year, with 72.7%. The same goes for the net margin, which climbs to 24.51%. We should also note an equally interesting free cash flow margin, with 18.36%.

In terms of profitability, there is nothing to complain about, with an ROA (up) at 16.6%, a CFROA at 21.55% and an ROE of 39.34%. This is a company that is not affected by the crisis...

Debt

While SMEs are getting into debt, the Basel giant continues to reduce its liabilities as it does every year. The long-term debt ratio to assets has thus fallen to 12.88%. Total debt now represents 0.42 times equity. It would only take Roche one year to repay it with its free cash flow.

Shareholder return

It should be noted that the repayment of net debt represented an average annual return for the shareholder of 2.06% over the last five years. Furthermore, this was not achieved at the cost of a capital increase, as the number of shares outstanding remained virtually identical over the same period.

Overall, the average annual shareholder return has been 4.81% over the last five years, which is very appreciable. 81% of the free cash during this period was used to repay debt and pay the dividend. This generous shareholder return is therefore highly dependent on the free cash flows achieved by Roche.

Cash cow

Precisely, the Swiss pharmaceutical group stands out as we have seen previously by a rather impressive profitability and profitability. This is valid for this last financial year, but also for the previous ones. The average gross margin over the last five years is thus 71.4% and the net margin 20.2%. The company is helped in this by relatively low overheads (30% on average) as well as correct capital expenditure (51% of profit on average).

Risks of Roche stock

The stock has shown relatively low volatility compared to the market over the last twelve months, with "only" 21.72%. This confirms the defensive nature of Roche shares, which also have a beta of 0.85, indicating not too much sensitivity to market variations.

Let us also note a high Z-Score (Altman), at 5.42 (green zone), as well as an equally impressive F-Score (Piotroski), of eight points out of nine. Roche is therefore not ready to go bankrupt, it is very solid financially, with fundamentals that are becoming even better.

Conclusion

Ultimately, despite a more attractive valuation than a year ago, we find ourselves practically at the same point.

Roche is certainly an extremely profitable and profitable company, which provides a generous return to its shareholders. There is little doubt that this will continue in the future. The current health paranoia may even represent an opportunity for the Basel giant.

However, paying more than four times sales and more than seven times book value is inviting a dangerous backlash.

Are you willing to take the risk?