Depomed, Inc. Investment Analysis on Depomed

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Figure 4: Comparable Companies Analysis

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From comparable companies analysis, DEPO’s price may be undervalued which means there is still increase space for the share price.

- Good Information of DEPO

- Aug 9, 2016, the close price of DEPO was $21.5 (increased 1.22%), compared with S&P 500 $2181.7 (increased 0.04%), DEPO had a great increase in its price.

- Revenue year over year revenue growth in 2016 Q2 was almost 23.5%.

- DEPO has a great significant sales growth rate, in 2015, the growth rate was 199%, the estimated 1 year sales growth rate in 2016 would be 43%, 2 year CAGR would be 30.3%, the long-term 5 year CAGR would be 19%.

- Compared with comparable companies’ average multiple 4.4 Price/Sales multiple of DEPO was 3.02, which stock is trading at a competitive price.

- DEPO has beta 1.35, leveraged beta 3.44, while the market risk premium 4.9, DEPO has lower risk level compared with market status.

- Finally, DEPO has healthy Free Cash Flow margin 31% in 2016 Q1.

- Risk Sections of DEPO

However, there are still some risk sections of investing in DEPO:

- DEPO had a negative operating margin in 2015, it was -4.1%, in 2016 Q1, it was -32%.

- The net profits were also negative in 2015 and first 2 quarters of 2016. 2016Q1 was -20%, 2016Q2 was -9%.

- Debt/Equity ratio is 2.39 which is worse than the average status of DEPO’s competitive companies. Additionally, Debt/total capitalization was 70%, compared with the average medical-drug industry 44%, DEPO’s debt status was too high to have a liquidity risk.

- The net profits of DEPO was negative, thus, PE ratio is meaningless for DEPO

- DEPO has negative ROIC (Return on Invested Capital) -18%, which indicated that the company was operational inefficiency.

- The negative ROC (Return on Equity) -50% indicated that DEPO may not able to generate profits with the money shareholders have invested.