Jazz Pharmaceuticals’s 29.7% return over the past six months has outpaced the S&P 500 by 17%, and its stock price has climbed to $240.49 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
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Why Is Jazz Pharmaceuticals Not Exciting?
We’re glad investors have benefited from the price increase, but we’re cautious about Jazz Pharmaceuticals. Here are two reasons you should be careful with JAZZ, plus one 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.
Analyzing the trend in its profitability, Jazz Pharmaceuticals’s adjusted operating margin decreased by 2.6 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 41.7%.
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? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Jazz Pharmaceuticals 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
Jazz Pharmaceuticals isn’t a terrible business, but it isn’t one of our picks. With its shares beating the market recently, the stock trades at 9.6× forward P/E (or $240.49 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are superior stocks to buy right now. We’d suggest looking at our favorite semiconductor picks and shovels play.
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