Payday has arrived and it’s time to start hunting for undervalued stocks to buy. Using a discounted cash flow model, I’ve identified three pharma stocks I think have growth potential. With an expected annual growth rate (CAGR) of 6.19% over the next four years, the pharmaceuticals industry looks promising to me.
I plan on buying shares in these three companies before their prices take off.
A fledgling pharma firm on the rise
Belfast-based diagnostics and testing company Diaceutics (LSE:DXRX) serves 20 of the 30 largest pharmaceutical companies worldwide. Its products help streamline the development and launch of specialised medicines.
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Despite many high-profile clients, it’s essentially a penny stock with an £88m market cap and 104p share price. Besides a brief surge in 2020, the share price has traded around 100p for the past five years.
Earnings have been declining at an average annual rate of 17.7% and profit margins are down to 0.03% from 0.8% last year. With a price-to-sales (P/S) ratio of 4, it’s on par with the industry average.
So why do I think it’s got potential?
For one, a significant number of insiders recently started buying the shares. This is usually a good indicator that the company is expected to profit soon. Approximately 33,564 shares were bought by insiders recently, while it’s been over nine months since any were sold.
And it hasn’t gone unnoticed. Consensus from several analysts forecast a price rise of 60% on average over the next 12 months. Using a discounted cash flow model, analysts estimate the shares to be undervalued by 78%.
The booming mid-cap pharma stock
Spire Healthcare Group (LSE:SPI) is the second-largest provider of private healthcare in the UK. The FTSE 250 stock shot up after Covid and has been doing well since. It gained 10% this past year and is up 75% in the past five years.
Despite the growth, future cash flows estimate the share price to be 65.8% below fair value. Checking analyst’s forecasts, there’s a good consensus that the price could rise 26% in the next 12 months.
So what’s the catch?
Spire has a fair amount of debt and limited operating income to cover the interest payments. Its interest coverage ratio is only 1.4, so even a small decline in income could reduce its ability to service debt. Although it’s doing well, the private healthcare market is highly competitive so it must stay ahead of the curve to avoid defaulting on debt.
The FTSE 100 pharma giant with promise
Hikma Pharmaceuticals (LSE:HIK) has had lacklustre performance over the past five years, up only 1.6%. Now at £17.88, the share price crashed hard in 2022 and has struggled to break back above £20 since.
What’s more, some of its biggest-selling generic drugs are coming off patent soon, so it’s at risk of losing that market share to competitors.
So why do I think it’s got potential?
The firm has been expanding rapidly, acquiring new business and building new facilities. Its injectable and generic drug businesses are in high demand and it has the resources to meet this need. Future cash flow estimates indicate the share price could be trading at almost 30% below fair value. Based on consensus from several analysts, the price rise is expected to grow 28% in the next 12 months.
