Rating Update: Stock Rating F-Lowest (3/4/19)-XOMA Corp (XOMA).

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BUSINESS

XOMA Corporation engages in the discovery, development, and licensing of therapeutic antibodies in the United States, Europe, and the Asia Pacific. The company has a portfolio of monoclonal antibodies and technologies to license to pharmaceutical and biotechnology companies to further their clinical development. Its proprietary product candidates include X213, an allosteric inhibitor of prolactin action; XMetA, an insulin receptor-activating antibody designed to provide long-acting reduction of hyperglycemia in Type 2 diabetic patients; and other preclinical product candidates, such as interleukin 2, a therapy for metastatic melanoma and renal cell carcinoma, as well as anti-parathyroid receptor to address unmet medical needs. The company also licenses antibody discovery, optimization, and development technologies.
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INVESTMENT RATING

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XOMA is expected to continue to be a major Value Eraser reflecting capital returns that are forecasted to be below the cost of capital.

XOMA has a current Value Trend Rating of F (Lowest Rating).
The Value Trend Rating reflects consistent signals from PTR’s two proprietary measures of a stock’s attractiveness. XOMA has a poor Power Rating of 18 and a very low Appreciation Score of 1, leading to the Lowest Value Trend Rating.

XOMA’s stock is selling significantly above targeted value. The current stock price of $15.16 compares to targeted value 12 months forward of $1.
XOMA’s very low appreciation potential results in an appreciation score of 1 (99% of the universe has greater appreciation potential.)
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XOMA has a Power Rating of 18. (This poor Power Rating indicates that XOMA only has a better chance of achieving attractive investment performance over the near to intermediate term than 18% of companies in the universe.)
Factors contributing to this poor Power Rating include: recent price action has been unfavorable; and is currently in an unfavorable positi. An offsetting factor is earnings estimate behavior for XOMA has been slightly favorable recently.

INVESTMENT PROFILE

XOMA’s financial strength is high. Financial strength rating is 82.
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Relative to the S&P 500 Composite, XOMA Corp has significant Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that XOMA is higher risk. Relative weaknesses include: low historical profitability, high stock price volatility, and high financial leverage. XOMA’s valuation is high: low dividend yield, moderate P/E ratio, and high price/book ratio. XOMA has unusually low market capitalization.

CURRENT SIGNALS

XOMA’s current operations are strong. Return on equity is rising, reflecting: and improving asset utilization.

XOMA’s current technical position is mixed. The stock price is in a 2.3 month up move. The stock has appreciated 35.3% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Recent notable positive changes in investment behavior have benefitted XOMA Corporation (NASDAQ: XOMA): its shorter term price trend turned up.
XOMA Corporation (NASDAQ: XOMA) suffers from important negative changes in fundamentals: significant quarterly sales deceleration occurred, and significant quarterly earnings deceleration occurred.
The stock is currently rated F.
On 3/4/19, XOMA Corporation (NASDAQ: XOMA) stock enjoyed a major increase of 12.7%, closing at $1.02. However, this advance was accompanied by exceptionally low trading volume at 29% of normal. Relative to the market the stock has been extremely weak over the last nine months but has risen 5.1% during the last week.

CASH FLOW

In 2017, XOMA generated a very significant increase in cash of +$17.73 million (+69%). Sources of cash were much larger than uses. Cash generated from 2017 EBITDA totalled +$20.78 million. Non-operating uses consumed -$2.98 million (-14% of EBITDA). Cash taxes consumed -$1.66 million (-8% of EBITDA). Re-investment in the business amounted to -$6.80 million (-33% of EBITDA). On a net basis, debt investors withdrew -$30.01 million (-144% of EBITDA) while equity investors contributed +$38.40 million (+185% of EBITDA).
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XOMA’s Non-operating Income, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Xoma Corp Peer Group. In most years, XOMA was in the third quartile and top quartile. Currently, XOMA is substantially below median at -14% of EBITDA (-$2.98 million).

XOMA’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Xoma Corp Peer Group. In most years, XOMA was in the top quartile. Currently, XOMA is at the upper quartile at -8% of EBITDA (-$1.66 million).

XOMA’s Business Re-investment, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Xoma Corp Peer Group. (Since 2015 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, XOMA was in the second quartile and lower quartile. Currently, XOMA is lower quartile at -33% of EBITDA (-$6.80 million).

XOMA’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by stability for the Xoma Corp Peer Group. In most years, XOMA was in the top quartile and lower quartile. Currently, XOMA is lower quartile at -144% of EBITDA (-$30.01 million).

XOMA’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Xoma Corp Peer Group. (Since 2013 Equity Investors, %EBITDA has accelerated very sharply.) In most years, XOMA was in the lower quartile and top quartile. Currently, XOMA is upper quartile at +185% of EBITDA (+$38.40 million).

XOMA’s Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Xoma Corp Peer Group. (Since 2015 Change in Cash, %EBITDA has accelerated very sharply.) In most years, XOMA was in the top quartile and lower quartile. Currently, XOMA is upper quartile at +85% of EBITDA (+$17.73 million).
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XOMA’s Cash, %Revenue has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by an opposite trend for the Xoma Corp Peer Group. In most years, XOMA was in the top quartile. Currently, XOMA is upper quartile at +83%.

PROFITABILITY

XOMA’s return on equity has improved very significantly since 2008.
XOMA’s very strong negative trend in pretax operating return significantly offset by a very strong positive trend in non-operating factors is a major performance consideration.
The productivity of XOMA’s assets declined over the full period 2008-2018: asset turnover has suffered a volatile overall downtrend.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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XOMA’s return on equity is lower quartile (-1010%) for the four quarters ended September, 2018.
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Operating performance (pretax return on assets) is lower quartile (-25.3%) reflecting asset turnover that is lower quartile (0.19X) and lower quartile pretax margin (-130.%).
Tax “keep” rate (income tax management) is at the upper quartile (99.6%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is upper quartile (40.04X).

GROWTH RATES

There are no significant differences between XOMA’s longer term growth and growth in recent years.
XOMA’s historical income statement growth and balance sheet growth have diverged. Revenue growth has fallen short of asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been -12.2% per year.

Total asset growth has been -1.1% per year. (More recently it has been 94.6%.)

Annual E.P.S. growth has been 2.0% per year.

Equity growth has been -1.3% per year.
No consensus growth rate forecast is available for XOMA.
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Relative to the Xoma Corp Peer Group, XOMA’s historical growth measures are erratic. Equity growth (-1.3%) has been substantially below median. Total asset growth (-1.1%) has been below median. Revenue growth (-12.2%) has been lower quartile. E.P.S. growth (2.0%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, XOMA’s stock price performance has been volatile and significantly below market. Between May, 2008 and March, 2019, XOMA’s stock price fell -97%; relative to the market, this was a -99% loss. Significant price moves during the period: 1) December, 2016 – December, 2017: +744%; 2) July, 2016 – December, 2016: -69%; 3) December, 2015 – June, 2016: -59%; 4) June, 2015 – July, 2015: -81%; 5) February, 2014 – July, 2014: -54%; and 6) December, 2012 – July, 2013: +126%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -63.3% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through January, 2019 of -63.3% is lower quartile relative to XOMA Corp Peer Group.

Current 5-year total return performance of -40.0% is lower quartile relative to the S&P 500 Composite.
Through January, 2019, with lower quartile current 5-year total return of -40.0% relative to S&P 500 Composite, XOMA’s total return performance is lower quartile relative to XOMA Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, XOMA’s overall valuation is exceptionally high. The highest factor, the price/equity ratio, is upper quartile. Ratio of enterprise value/revenue is upper quartile. Ratio of enterprise value/assets is upper quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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XOMA has a major value gap compared to the median valuation. For XOMA to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 13.96X to 6.77X. If XOMA’s ratio of enterprise value/revenue were to fall to 6.77X, its stock price would be lower by $-7 to $8.
For XOMA to fall to lower quartile valuation relative to the XOMA Corp Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 13.96X to 1.87X. If XOMA’s ratio of enterprise value/revenue were to fall to 1.87X, its stock price would decline by $-12 from the current level of $15.

VALUE TARGETS

XOMA is expected to continue to be a major Value Eraser reflecting capital returns that are forecasted to be below the cost of capital.
XOMA’s current Price Target of $1 represents a -95% change from the current price of $15.16.
XOMA’s very low appreciation potential results in an appreciation score of 1 (99% of the universe has greater appreciation potential.)
Reinforcing this low Appreciation Score of 1, the low Power Rating of 18 contributes to an Value Trend Rating of F.
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XOMA’s current Price Target is $1 (-9% from the 2017 Target of $1 and -95% from the 03/04/19 price of $15.16). This slight fall in the Target is the result of a -9% decrease in the equity base and a +0% change in the price/equity multiple. None of the Value Drivers has an impact on the price/equity multiple. The forecasted increase in growth has no impact on the multiple. The forecasted decline in cost of equity also has no impact and the decline in return on equity didn’t either.
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PTR’s return on equity forecast is -10.% — significantly below our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2009 and 2017. The current forecast is significantly below the 2013 peak of 4110%.

PTR’s growth forecast is 12.0% — above our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2016 and 2017. The current forecast is significantly above the 2016 low of 1%.

PTR’s cost of equity forecast is 5.5% — below recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2009 and 2017. The current forecast is steady at the 2009 low of 4.3%.
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At XOMA’s current price of $15.16, investors are placing a positive value of $2388 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 3.0% per year, and a return on equity of 4.0% versus a cost of equity of 12.4%.
PTR’s 2019 Price Target of $1 is based on these forecasts and reflects an estimated value of existing assets of $3 and a value of future investments of $-2.

About John Lafferty 44922 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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