Rating Update: Stock Rating F-Lowest (11/29/19)-Prothena Corp PLC (PRTA).

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BUSINESS

Prothena Corporation plc, a late-stage clinical biotechnology company, focuses on the discovery, development, and commercialization of novel immunotherapies for the treatment of diseases in the neuroscience and orphan categories. The company is developing antibody-based product candidates that include NEOD001, a monoclonal antibody that is in Phase III and Phase IIb clinical trials for the treatment of AL amyloidosis; PRX002/RG7935 that is in Phase II clinical trial for treating Parkinson’s disease and other related synucleinopathies; and PRX004, a monoclonal antibody that is under preclinical development for the treatment of ATTR Amyloidosis.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to fall short of the cost of capital, PRTA is expected to be a major Value Eraser.

Prothena 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. Prothena has a poor Appreciation Score of 15 and a very low Power Rating of 10, with the Lowest Value Trend Rating the result.

Prothena’s stock is selling significantly above targeted value. The current stock price of $12.82 compares to targeted value 12 months forward of $7.
Prothena’s low appreciation potential results in an appreciation score of 15 (85% of the universe has greater appreciation potential.)
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Prothena has a Power Rating of 10. (PRTA’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 10% of companies in the universe.)
Factors contributing to this very low Power Rating include: the trend in PRTA’s earnings estimates has been unfavorable in recent months; is currently in an unfavorable positi; and recent price action has been unfavorable.

INVESTMENT PROFILE

Prothena’s financial strength is below average. Financial strength rating is 36.
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Relative to the S&P 500 Composite, Prothena Corp PLC has significant Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that PRTA is normal risk. Low financial leverage is a positive for Prothena. Relative weaknesses include: low historical profitability, low financial strength, low expected growth, and low historical growth. Prothena’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. PRTA has unusually low market capitalization.

CURRENT SIGNALS

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

Prothena’s current technical position is mixed. The stock price is in a 3.3 month up move. The stock has appreciated 86.1% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

The stock is currently rated F.
Prothena Corp Plc (NASDAQ: PRTA) stock closed at $0.90 on 11/29/19 after a major increase of 10.0%. However, below average trading volume at 68% of normal accompanied the advance. The stock has risen 19.3% during the last week but has been weak relative to the market over the last nine months.

CASH FLOW

In 2018, Prothena generated an increase in cash of +$10.04 million (+2%). Sources of cash were very slightly larger than uses. Cash consumed from 2018 EBITDA totaled -$139.49 million. Non-operating uses consumed -$9.71 million (+7% of EBITDA). Cash taxes contributed +$0.47 million (-0% of EBITDA). Withdrawal of investment from the business totalled +$95.93 million (-69% of EBITDA). On a net basis, debt investors removed -$8.61 million (+6% of EBITDA) while equity investors supplied +$71.45 million (-51% of EBITDA).
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Prothena’s Non-operating Income, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Prothena Corp Plc Peer Group. In most years, Prothena was in the second quartile and top quartile. Currently, Prothena is above median at +7% of EBITDA (-$9.71 million).

Prothena’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Prothena Corp Plc Peer Group. In most years, Prothena was in the top quartile. Currently, Prothena is lower quartile at -0% of EBITDA (+$0.47 million).

Prothena’s Business Re-investment, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Prothena Corp Plc Peer Group. (Since 2016 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Prothena was in the top quartile. Currently, Prothena is substantially below median at -69% of EBITDA (+$95.93 million).

Prothena’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Prothena Corp Plc Peer Group. In most years, Prothena was in the top quartile. Currently, Prothena is at the upper quartile at +6% of EBITDA (-$8.61 million).

Prothena’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Prothena Corp Plc Peer Group. (Since 2014 Equity Investors, %EBITDA has accelerated very sharply.) In most years, Prothena was in the third quartile. Currently, Prothena is slightly below median at -51% of EBITDA (+$71.45 million).

Prothena’s Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Prothena Corp Plc Peer Group. (Since 2014 Change in Cash, %EBITDA has accelerated very sharply.) In most years, Prothena was in the second quartile. Currently, Prothena is slightly above median at -7% of EBITDA (+$10.04 million).
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Prothena’s Cash, %Revenue has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Prothena Corp Plc Peer Group. (Since 2012 Cash, %Revenue has sharply decelerated.) In most years, Prothena was in the top quartile. Currently, Prothena is upper quartile at +44781%.

PROFITABILITY

Prothena’s return on equity reached a new post-2011 low in 2017.
The productivity of Prothena’s assets declined over the full period 2009-2019: asset turnover has experienced a downtrend.
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Prothena’s return on equity is unavailable for the four quarters ended December, 2018.
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Operating performance (pretax return on assets) is unavailable reflecting asset turnover that is unavailable and unavailable pretax margin .
Tax “keep” rate (income tax management) is unavailable resulting in after tax return on assets that is unavailable.
Financial leverage (leverage) is unavailable .

GROWTH RATES

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

Annual revenue growth has been -7.9% per year.

Total asset growth has been 36.7% per year.

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

Equity growth has been 0.2% per year.
No consensus growth rate forecast is available for Prothena.
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Relative to the Prothena Corp Plc Peer Group, Prothena’s historical growth measures are highly erratic. Total asset growth (36.7%) has been upper quartile. Equity growth (0.2%) has been slightly above median. Revenue growth (-7.9%) has been substantially below median. E.P.S. growth is unavailable.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Prothena’s stock price performance has been variable and below market. Between April, 2013 and November, 2019, Prothena’s stock price rose +55%; relative to the market, this was a -21% loss. Significant price moves during the period: 1) September, 2017 – April, 2018: -81%; 2) November, 2015 – February, 2016: -55%; 3) July, 2014 – July, 2015: +280%; 4) March, 2014 – July, 2014: -55%; and 5) April, 2013 – March, 2014: +364%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -26.6% 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 October, 2019 of -26.6% is substantially below median relative to Prothena Corp Plc Peer Group.

Current 5-year total return performance of -16.1% is lower quartile relative to the S&P 500 Composite.
Through October, 2019, with lower quartile current 5-year total return of -16.1% relative to S&P 500 Composite, Prothena’s total return performance is below median relative to Prothena Corp Plc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, PRTA’s overall valuation is high. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Price/equity ratio is 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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Prothena has a very large value gap compared to the median valuation. For PRTA to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 193.30X to 43.91X. If PRTA’s ratio of enterprise value/revenue were to fall to 43.91X, its stock price would be lower by $-3 to $10.
For PRTA to fall to lower quartile valuation relative to the Prothena Corp Plc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 193.30X to 21.35X. If PRTA’s ratio of enterprise value/revenue were to fall to 21.35X, its stock price would decline by $-3 from the current level of $13.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to fall short of the cost of capital, PRTA is expected to be a major Value Eraser.
Prothena’s current Price Target of $7 represents a -46% change from the current price of $12.82.
Prothena’s low appreciation potential results in an appreciation score of 15 (85% of the universe has greater appreciation potential.)
Reinforcing this low Appreciation Score of 15, the low Power Rating of 10 contributes to an Value Trend Rating of F.
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Prothena’s current Price Target is $7 (+1% from the 2018 Target of $7 but -46% from the 11/29/19 price of $12.82). This plateau in the Target is the result of a +1% 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 decline 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 2011 and 2018. The current forecast is significantly below the 2011 low of 4%.

PTR’s growth forecast is 4.0% — slightly below our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2011 and 2018. The current forecast is significantly below the 2014 peak of 75%.

PTR’s cost of equity forecast is 4.7% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2012 and 2018. The current forecast is below the 2016 peak of 9.7%.
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At Prothena’s current price of $12.82, investors are placing a positive value of $2 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 6.0% per year, and a return on equity of 4.0% versus a cost of equity of 4.9%.
PTR’s 2020 Price Target of $7 is based on these forecasts and reflects an estimated value of existing assets of $5 and a value of future investments of $2.

About John Lafferty 54938 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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