Rating Update: Stock Rating F-Lowest (9/6/19)-Nektar Therapeutics (NKTR).

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BUSINESS

Nektar Therapeutics, a research-based biopharmaceutical company, discovers and develops drug candidates for cancer, auto-immune disease, and chronic pain in the United States. The company offers ONZEALD, a topoisomerase I inhibitor that is in Phase III clinical trial for advanced metastatic breast cancer in patients with brain metastases; NKTR-181, an orally-available mu-opioid analgesic molecule, which is in Phase III clinical trial for moderate to severe chronic pain; NKTR-214, a cytokine immunostimulatory therapy that is in Phase I/II to treat cancer; NKTR-358, which is in Phase I to treat autoimmune diseases; and NKTR-262 for solid tumors, as well as NKTR-255 that is under research/preclinical stage for immuno-oncology.
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INVESTMENT RATING

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NKTR’s future returns on capital are forecasted to fall short of the cost of capital. Accordingly, the company is expected to continue to be a major Value Eraser.

Nektar Therapeutics 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 consistent signals. Nektar Therapeutics has a poor Appreciation Score of 28 and a very low Power Rating of 15, triggering the Lowest Value Trend Rating.

Nektar Therapeutics’ stock is selling well above targeted value. The current stock price of $17.01 compares to targeted value 12 months forward of $13.
This low appreciation potential results in an appreciation score of 28 (72% of the universe has greater appreciation potential.)
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Nektar Therapeutics has a Power Rating of 15. (NKTR’s very low Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 15% of companies in the universe.)
Factors contributing to this very low Power Rating include: recent price action has been extremely unfavorable; and is currently in an unfavorable positi. An offsetting factor is earnings estimate behavior for NKTR has been slightly favorable recently.

INVESTMENT PROFILE

NKTR’s financial strength is exceptional. Financial strength rating is 93.
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Relative to the S&P 500 Composite, Nektar Therapeutics has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that NKTR is normal risk. Relative weaknesses include: low historical profitability, high stock price volatility, and high earnings variability. NKTR’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. NKTR has unusually low market capitalization.

CURRENT SIGNALS

Nektar Therapeutics’ current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; falling tax keep rate; and falling leverage.

Nektar Therapeutics’ current technical position is very weak. The stock price is in a 7.2 month down move. The stock has declined 38.7% from its prior high. The stock price is below its 200 day moving average which is in a downtrend. Nektar Therapeutics’ stock price decline is extreme and the stock appears oversold.

ALERTS

Recent meaningful negative changes in investment behavior have impacted Nektar Therapeutics (NASDAQ: NKTR): negative upside/downside volume developed.
Important negative changes in fundamentals have recently occurred for Nektar Therapeutics (NASDAQ: NKTR): significant quarterly sales deceleration occurred, and significant quarterly earnings deceleration occurred.
The stock is currently rated F.
Nektar Therapeutics (NASDAQ: NKTR) stock closed at $0.38 on 9/6/19 after a major increase of 18.0%. However, this advance was accompanied by below average trading volume at 76% of normal. The stock has declined -2.6% during the last week and has been extremely weak relative to the market over the last nine months.

CASH FLOW

In 2018, Nektar Therapeutics generated a very significant increase in cash of +$1,039.2 million (+351%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$696.7 million. Non-operating sources contributed +$37.6 million (+5% of EBITDA). Cash taxes consumed -$1.4 million (-0% of EBITDA). Re-investment in the business amounted to -$589.3 million (-85% of EBITDA). On a net basis, debt investors removed -$52.8 million (-8% of EBITDA) while equity investors contributed +$948.4 million (+136% of EBITDA).
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Nektar Therapeutics’ Non-operating Income, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Nektar Therapeutics Peer Group. In most years, Nektar Therapeutics was in the top quartile and second quartile. Currently, Nektar Therapeutics is above median at +5% of EBITDA (+$37.6 million).

Nektar Therapeutics’ Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Nektar Therapeutics Peer Group. In most years, Nektar Therapeutics was in the top quartile. Currently, Nektar Therapeutics is upper quartile at -0% of EBITDA (-$1.4 million).

Nektar Therapeutics’ Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Nektar Therapeutics Peer Group. In most years, Nektar Therapeutics was in the top quartile and lower quartile. Currently, Nektar Therapeutics is slightly above median at -85% of EBITDA (-$589.3 million).

Nektar Therapeutics’ Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Nektar Therapeutics Peer Group. In most years, Nektar Therapeutics was in the top quartile. Currently, Nektar Therapeutics is lower quartile at -8% of EBITDA (-$52.8 million).

Nektar Therapeutics’ Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Nektar Therapeutics Peer Group. (Since 2014 Equity Investors, %EBITDA has accelerated very sharply.) In most years, Nektar Therapeutics was in the lower quartile and top quartile. Currently, Nektar Therapeutics is upper quartile at +136% of EBITDA (+$948.4 million).

Nektar Therapeutics’ Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Nektar Therapeutics Peer Group. In most years, Nektar Therapeutics was in the top quartile and lower quartile. Currently, Nektar Therapeutics is upper quartile at +149% of EBITDA (+$1,039.2 million).
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Nektar Therapeutics’ Cash, %Revenue has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Nektar Therapeutics Peer Group. In most years, Nektar Therapeutics was in the top quartile. Currently, Nektar Therapeutics is upper quartile at +112%.

PROFITABILITY

Nektar Therapeutics’ return on equity has eroded very significantly since 2013.
The productivity of Nektar Therapeutics’ assets rose over the full period 2009-2019: asset turnover has enjoyed a volatile overall uptrend even as it experienced a very sharp decline after the 2017 high.
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Nektar Therapeutics’ return on equity is lower quartile (-27.2%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is lower quartile (-20.3%) reflecting asset turnover that is lower quartile (0.06X) and lower quartile pretax margin (-358.%).
Tax “keep” rate (income tax management) is at the upper quartile (99.1%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is below median (1.35X).

GROWTH RATES

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

Annual revenue growth has been 9.1% per year.

Total asset growth has been 4.4% per year.

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

Equity growth has been 13.9% per year. (More recently it has been 279.3%.)
No consensus growth rate forecast is available for Nektar Therapeutics.
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Relative to the Nektar Therapeutics Peer Group, Nektar Therapeutics’ historical growth measures are generally third quartile. Revenue growth (9.1%) has been below median. Total asset growth (4.4%) has been substantially below median. Equity growth (13.9%) has been below median. E.P.S. growth is unavailable.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Nektar Therapeutics’ stock price performance has been volatile and in line with the market. Between November, 2008 and September, 2019, Nektar Therapeutics’ stock price rose +258%; relative to the market, this was a +8% gain. Significant price moves during the period: 1) January, 2019 – September, 2019: -60%; 2) August, 2018 – December, 2018: -51%; 3) March, 2018 – June, 2018: -54%; 4) April, 2017 – March, 2018: +460%; 5) September, 2011 – September, 2012: +120%; and 6) September, 2010 – September, 2011: -67%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -45.9% 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 July, 2019 of -45.9% is lower quartile relative to Nektar Therapeutics Peer Group.

Current 5-year total return performance of 22.0% is upper quartile relative to the S&P 500 Composite.
Through July, 2019, with upper quartile current 5-year total return of 22.0% relative to S&P 500 Composite, Nektar Therapeutics’ total return performance is at median relative to Nektar Therapeutics Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, NKTR’s overall valuation is quite high. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Price/equity ratio is near the lower quartile. Ratio of enterprise value/assets is near the lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.

Relative to Nektar Therapeutics Peer Group, NKTR’s overall valuation is high. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Price/equity ratio is near the lower quartile. Ratio of enterprise value/assets is lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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Nektar Therapeutics has a major value gap compared to the median valuation. For NKTR to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 15.87X to 4.63X. If NKTR’s ratio of enterprise value/revenue were to fall to 4.63X, its stock price would be lower by $-8 to $9.
For NKTR to fall to lower quartile valuation relative to the Nektar Therapeutics Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 15.87X to 2.17X. If NKTR’s ratio of enterprise value/revenue were to fall to 2.17X, its stock price would decline by $-9 from the current level of $17.

VALUE TARGETS

NKTR’s future returns on capital are forecasted to fall short of the cost of capital. Accordingly, the company is expected to continue to be a major Value Eraser.
Nektar Therapeutics’ current Price Target of $14 represents a -18% change from the current price of $17.01.
This low appreciation potential results in an appreciation score of 28 (72% of the universe has greater appreciation potential.)
Reinforcing this low Appreciation Score of 28, the low Power Rating of 15 contributes to an Value Trend Rating of F.
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Nektar Therapeutics’ current Price Target is $14 (+54% from the 2018 Target of $9 but -18% from the 09/06/19 price of $17.01). This dramatic rise in the Target is the result of a +54% 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 2010 low of 4%.

PTR’s growth forecast is 30.0% — substantially above our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is significantly above the 2015 low of -2%.

PTR’s cost of equity forecast is 8.9% — slightly 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 4.6%.
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At Nektar Therapeutics’ current price of $17.01, investors are placing a positive value of $24 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 11.8%.
PTR’s 2020 Price Target of $14 is based on these forecasts and reflects an estimated value of existing assets of $1 and a value of future investments of $13.

About John Lafferty 49646 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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