Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) Stock Rockets 25% As Investors Are Less Pessimistic Than Expected

The Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) share price has done very well over the last month, posting an excellent gain of 25%. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.6% over the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Regeneron Pharmaceuticals’ P/E ratio of 16.3x, since the median price-to-earnings (or “P/E”) ratio in the United States is also close to 18x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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Regeneron Pharmaceuticals could be doing better as it’s been growing earnings less than most other companies lately. One possibility is that the P/E is moderate because investors think this lacklustre earnings performance will turn around. You’d really hope so, otherwise you’re paying a relatively elevated price for a company with this sort of growth profile.

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What Are Growth Metrics Telling Us About The P/E?

The only time you’d be comfortable seeing a P/E like Regeneron Pharmaceuticals’ is when the company’s growth is tracking the market closely.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Whilst it’s an improvement, it wasn’t enough to get the company out of the hole it was in, with earnings down 11% overall from three years ago. Therefore, it’s fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 3.9% per annum as estimated by the analysts watching the company. That’s shaping up to be materially lower than the 11% per annum growth forecast for the broader market.

In light of this, it’s curious that Regeneron Pharmaceuticals’ P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Its shares have lifted substantially and now Regeneron Pharmaceuticals’ P/E is also back up to the market median. It’s argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Regeneron Pharmaceuticals’ analyst forecasts revealed that its inferior earnings outlook isn’t impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it’s challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company’s balance sheet. Our free balance sheet analysis for Regeneron Pharmaceuticals with six simple checks will allow you to discover any risks that could be an issue.

If you’re unsure about the strength of Regeneron Pharmaceuticals’ business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.