2023-05-04 16:37:47 ET
Summary
- United Therapeutics Corporation came in with a strong topline in Q1 FY'23, growing 10% YoY.
- The Tyvaso label was the star, growing 40% or $66mm over the 12 months.
- This shrugs off major threats from the label's competitors.
- The market has rewarded United Therapeutics Corporation's earnings growth with higher market valuations over the years. If this were to continue, there is strong value on offer here.
- Net-net, reiterate buy on United Therapeutics Corporation.
Investment summary
Despite a wind-back in price terms since my last publication on United Therapeutics Corporation ( UTHR ) in February, I am still constructive on the company following its Q1 FY'23 results. The topline was strong at a $45mm YoY increase, underscored by Tyvaso sales of $238mm for the period - another 49% YoY growth. One thing to note is the 98% YoY change in the cost of sales, $52mm, also tied to getting Tyvaso units out the door.
It does appear the market has lower expectations for UTHR going forward. Recall that UTHR was denied a rehearing request to a court's ruling that its Tyvaso label was unpatentable. I talked about this in my last UTHR publication. Investors were very quick to shun the company at the Tyvaso ruling. I'd note this isn't terrible, and the competitor involved, LQDA, still has execution risk ahead, whereas UTHR grew its Tyvaso sales nearly 50% YoY. In fact, the strong growth rate in Tyvaso is further vindication of my investment thesis, and in my opinion, UTHR could do well over $2Bn in revenues this year on $1Bn in operating profit, both records for the company. Net-net, despite it trading lower in the near term, I am reiterating the call on United Therapeutics Corporation stock as a buy.
Fig. 1 - UTHR long-term equity line. Notice performance from 2020-date
UTHR Q1 numbers - key talking points
Notably, the major headline in Q1 for UTHR for me was the 10% YoY growth in topline to $506mm. That's a good number. The major driver of the topline was Tyvaso sales, so it's obvious to see management focusing on growth here. Not surprising given the points raised earlier.
However, the additional points to consider would be:
- Even though reported net revenues grew $45mm, Tyvaso sales were up another $66mm YoY to $238mm. Both volumes and enrolments were key to the upside - another promising sign. Other segments underperformed, getting to $45 net revenue.
- Hence, Tyvaso is driving the topline majorly, growing 39% from last year vs. 10% for net revenues.
- Total R&D investment lifted $14mm or 20% YoY to $83mm. This is going towards its TETON programs looking at Tyvaso label expansion to pulmonary fibrosis ("PF").
- Should this $83mm R&D investment pull through, this see Tyvaso feed into the $3.7Bn global treatment market for PF treatment.
- This is important because the label expansion of Tyvaso to the treatment of pulmonary hypertension in March FY'21 has coincided with a 39% YoY increase in revenues. This has certainly monetized UTHR's R&D investment in my opinion. Any similar performance from R&D conversions in the future would certainly be welcomed.
Fig. 2 - UTHR Q1 product sales
- Note the strength in Tyvaso revenue over the course of 12 months.
Fig. 2a - UTHR Quarterly Distributor Sales, Disaggregation
One factor that must be addressed is the 98% YoY increase in cost of revenues to $52mm. This kind of yearly increase isn't sustainable for profit growth. For example, it pulled the $507mm in turnover down to $5.20/share in earnings, negative growth from the $5.31 this time last year. Still, consensus is expecting $19.80 in EPS this year from UTHR and this would represent 18.5% growth.
In fact, just looking at consensus growth numbers , this could potentially generate FY'23 ROE of 20% for the company, which is a tidy jump of 28% from last year by the way. You'll see below the quant system rates UTHR highly across the entire growth spectrum. Two numbers that stand out to me are the 15% YoY growth in CapEx and 50% growth in NWC. I believe this demonstrates the level of investment UTHR is putting into maintaining Tyvaso's growth curve. You can see the 33% and 27% growth projections in EBIT and earnings respectively accompany this. These numbers are important for a number of reasons:
- Just looking at quarterly results since Q2 FY'20, UTHR has grown quarterly earnings from $107mm to $239mm, 8.3% compounded growth per year.
- At the same time, the market has assigned an 8% geometric growth rate over UTHR's market valuation to $10.6Bn at the time of writing.
- With that in mind, the market has matched each 1% in earnings growth to 1% increase in market value, a 1:1 ratio.
- If you bought UTHR today, you'd also get an 8.6% forward earnings yield, if the consensus EPS number is correct.
That, along with the 20% projected ROE this year and 11-12% returns on capital, tells me that UTHR is recycling capital well, and the market is noticing this. Therefore, in my opinion, it is a story of topline growth, capital productivity, and earnings upside for UTHR looking forward. The first quarter of FY'23 has the company on good track for that.
Fig 3.
Further discussion - UTHR economic value
Presume the market continues to match each 1% of UTHR's compounded earnings with 1% in compounded market valuation. If that's the case, each $1 of investment could be safe in UTHR's hands, in my opinion. Here's why:
One, with the Street expecting $1.3Bn EBIT from UTHR in FY'23, I can see the company doing $1Bn NOPAT on this, a $23mm growth from FY'22. My numbers also call for $145mm in CapEx, which could suggest a 16% return on incremental capital from FY'22-23 if the numbers fall within this range.
Two, UTHR is priced tremendously well with an 8.6% forward yield on offer. This is sweetened by the growth characteristics observed earlier. With 29% projected YoY growth in FCF/share (Figure 3), the 8.6% yield is a tidy combination if you ask me. That UTHR has been compounding earnings at 26% for 3-years is a spectacle. The share price has done basically the same thing, showing the value that's been created, an illustration of how the market rewards UTHR's profitability.
If I benchmark the S&P 500's forward earnings yield of 5.3%, plus the current UST-10-yr, an 8-10% hurdle rate is appropriate. With UTHR potentially throwing off $900-910mm in earnings this year - another 27% growth, along with a potential 16% return on new capital in FY'23, I believe the company will generate value above the hurdle rate. Looking at a composite of the 10% hurdle rate versus measures seen in Figure 4, UTHR can outpace the hurdle on basically all measures (8.6% earnings yield, still very attractive).
Therefore, using these assumptions, I would expect UTHR to outperform the market in the coming 12 months by recycling capital into growth investments that earn higher rates of return than the equity and treasury benchmarks.
Fig. 4
Valuation and conclusion
United Therapeutics Corporation is an absolute steal at 12.4x forward earnings in my opinion. This is 55% discount to the sector and 54% discount to comparable peers (Figure 5). The question is, what could I be missing here. With these small multiples, naturally you ask if there's a reason so. Oftentimes, the market has priced companies correctly, both at the high and low end. In that vein, it's best to think in first principles. Consider these points, related to price and value:
- The market expects another 27% bottom-line growth, and the 0.4x forward PEG ratio is evidence the market hasn't priced this in just yet.
- I also mentioned it could do another $1Bn in NOPAT and so priced at 7x forward EBIT is very attractive in my books as well and doesn't reflect the 33% projected EBIT growth.
- That and UTHR could do 16% return on incremental capital this year, 6 percentage points of economic profit.
- Investors should be pleased their investment is investing at 600bps return above the hurdle rate. The market will likely reward UTHR with higher multiples, paying more for each $1 of earnings.
- Hence, the projected 27% earnings growth for this year could add another 10-20% of market valuation, in my opinion.
These numbers tell me there are potential dislocations in price to value. At $19.80 consensus EPS, the 12.4x market multiple values UTHR at $245. Further, if you'd expect an 8.6% forward earnings yield, then the growth assumptions posted in this report would value the company at $247 per share. Each result lends another 8-10% upside from the market price at the time of writing. I believe this is attractive value and could even rate higher if UTHR comes in with a strong set of results throughout this year.
Fig. 5
The facts presented here today are supportive of a buy rating for UTHR in my opinion. It has been a sluggish year on the chart, but UTHR is a long-term compounder and historically has recycled capital well back into upsides in market valuation. Looking forward, it's reasonable to project 27-30% growth in pre-and post-tax earnings each this year.
At 12.4x forward P/E, and 8.6% forward earnings yield, it is hard to look past United Therapeutics Corporation with this kind of growth on offer. That and a potential 16% return on incremental capital in FY'23. If the market is accurate in assigning fair value, I believe it is attracted to these kinds of returns and would attract investment. Net-net, reiterate United Therapeutics Corporation as a buy.
For further details see:
United Therapeutics: Deep Value At 8-9% Earnings Yield, 12.4x P/E