Rating Update: Stock Rating F-Lowest (7/2/19)-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’s future returns on capital are forecasted to be below the cost of capital. Accordingly, the company is expected to continue to be a major Value Eraser.

XOMA has a current Value Trend Rating of F (Lowest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing inconsistent signals. XOMA has a very low Appreciation Score of 5 but a neutral Power Rating of 56, triggering the Lowest Value Trend Rating.

XOMA’s stock is selling significantly above targeted value. The current stock price of $15.34 compares to targeted value 12 months forward of $3.
XOMA’s very low appreciation potential results in an appreciation score of 5 (95% of the universe has greater appreciation potential.)
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XOMA has a Power Rating of 56. (This neutral Power Rating indicates that XOMA’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: recent price action has been slightly favorable; and earnings estimate behavior for XOMA has been slightly favorable recently. An offsetting factor is is currently in an unfavorable positi.

INVESTMENT PROFILE

XOMA’s financial strength is high. Financial strength rating is 76.
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Relative to the S&P 500 Composite, XOMA Corp has both Growth and Value 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, and high stock price volatility. XOMA’s valuation is moderate: low dividend yield, moderate P/E ratio, and moderate price/book ratio. XOMA has unusually low market capitalization.

CURRENT SIGNALS

XOMA’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; and falling leverage.

XOMA’s current technical position is very weak. The stock price is in a 1.2 month down move. The stock has declined 17.8% from its prior high. The stock price is below its 200 day moving average which is in a downtrend. The 200 day moving average has just turned down.

ALERTS

. Positive development: positive upside/downside volume developed. Negative development: its longer term price trend turned down.
Positive development: significant quarterly sales acceleration occurred. Negative development: significant quarterly earnings deceleration occurred.
The stock is currently rated F.
XOMA Corporation (NASDAQ: XOMA) stock closed at $0.31 on 7/2/19 after a major decline of -10.3%. However, this decline was accompanied by exceptionally low trading volume at 40% of normal. The stock has declined -2.0% during the last week but has been strong relative to the market over the last nine months.

CASH FLOW

In 2018, XOMA generated a slight increase in cash of +$2.31 million (+5%). Sources of cash were slightly larger than uses. Cash consumed from 2018 EBITDA totaled -$14.92 million. Non-operating sources contributed +$2.43 million (-16% of EBITDA). Cash taxes contributed +$0.10 million (-1% of EBITDA). Re-investment in the business amounted to -$18.63 million (+125% of EBITDA). On a net basis, debt investors provided +$6.99 million (-47% of EBITDA) while equity investors furnished +$26.34 million (-177% 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 an opposite trend 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 -16% of EBITDA (+$2.43 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 -1% of EBITDA (+$0.10 million).

XOMA’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Xoma Corp Peer Group. In most years, XOMA was in the third quartile and second quartile. Currently, XOMA is upper quartile at +125% of EBITDA (-$18.63 million).

XOMA’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Xoma Corp Peer Group. In most years, XOMA was in the top quartile and lower quartile. Currently, XOMA is lower quartile at -47% of EBITDA (+$6.99 million).

XOMA’s Equity Investors, %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 lower quartile and top quartile. Currently, XOMA is lower quartile at -177% of EBITDA (+$26.34 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. In most years, XOMA was in the top quartile and lower quartile. Currently, XOMA is lower quartile at -15% of EBITDA (+$2.31 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 and second quartile. Currently, XOMA is upper quartile at +864%.

PROFITABILITY

XOMA’s return on equity has eroded very significantly since 2010.
XOMA’s very strong negative trend in pretax operating return significantly augmented by a very strong negative trend in non-operating factors is a significant analytical factor.
The productivity of XOMA’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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XOMA’s return on equity is lower quartile (-26.2%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is lower quartile (-8.5%) reflecting asset turnover that is lower quartile (0.17X) and lower quartile pretax margin (-49.4%).
Tax “keep” rate (income tax management) is above median (98.5%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is at the upper quartile (3.15X).

GROWTH RATES

There are no significant differences between XOMA’s longer term growth and growth in recent years.
XOMA’s historical income statement and balance sheet growth are not available.

Annual revenue growth has been -3.9% per year.

Total asset growth has been 12.5% per year.

Annual E.P.S. growth is not available.

Equity growth has been 37.8% 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 highly erratic. Equity growth (37.8%) has been upper quartile. Total asset growth (12.5%) has been above median. Revenue growth (-3.9%) has been lower quartile. E.P.S. growth is unavailable.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, XOMA’s stock price performance has been extremely volatile and significantly below market. Between September, 2008 and July, 2019, XOMA’s stock price fell -98%; 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 -12.7% is substantially below median relative to the S&P 500 Composite.
In addition to being substantially below median relative to S&P 500 Composite, current annual total return performance through May, 2019 of -12.7% is below median relative to XOMA Corp Peer Group.

Current 5-year total return performance of -25.7% is lower quartile relative to the S&P 500 Composite.
Through May, 2019, with lower quartile current 5-year total return of -25.7% 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 quite high. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Price/equity ratio is above median. Ratio of enterprise value/assets is at median. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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XOMA has a very large value gap compared to the median. For XOMA to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 8.99X to 6.27X. If XOMA’s ratio of enterprise value/revenue were to fall to 6.27X, its stock price would be lower by $-4 to $11.
For XOMA to achieve upper quartile valuation relative to the XOMA Corp Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 8.99X to 8.99X. If XOMA’s ratio of enterprise value/revenue were to rise to 8.99X, its stock price would increase by $0 from the current level of $15.

VALUE TARGETS

XOMA’s future returns on capital are forecasted to be below the cost of capital. Accordingly, the company is expected to continue to be a major Value Eraser.
XOMA’s current Price Target of $3 represents a -79% change from the current price of $15.34.
XOMA’s very low appreciation potential results in an appreciation score of 5 (95% of the universe has greater appreciation potential.)
With this low Appreciation Score of 5, the neutral Power Rating of 56 results in an Value Trend Rating of F.
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XOMA’s current Price Target is $3 (+35% from the 2018 Target of $2 but -79% from the 07/02/19 price of $15.34). This dramatic rise in the Target is the result of a +35% increase 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 erratic but little changed between 2010 and 2018. The current forecast is significantly below the 2013 peak of 4110%.

PTR’s growth forecast is 36.0% — substantially above our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2016 and 2018. The current forecast is significantly above the 2016 low of 1%.

PTR’s cost of equity forecast is 8.8% — below recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2010 and 2018. The current forecast is above the 2015 low of 4.3%.
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At XOMA’s current price of $15.34, investors are placing a positive value of $17 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 15.0% per year, and a return on equity of 4.0% versus a cost of equity of 14.0%.
PTR’s 2020 Price Target of $3 is based on these forecasts and reflects an estimated value of existing assets of $1 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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