Getting Bearish On Celgene The Stock, Not The Company

May.22.14 | About: Celgene Corporation (CELG)

Summary

Financial efficiency ratios are deteriorating.

The stock is fairly valued based on 2015 earnings estimates and earnings growth potential.

The company missed top line estimates, but beat on the bottom line when they reported first-quarter earnings back on 24 Apr '14.

The last time I wrote about Celgene Corporation (NASDAQ:CELG) I stated, "Due to the bullish technicals, high near-term earnings growth expectations, and high long-term earnings growth expectations I will be pulling the trigger here right now." After writing the article, the stock gained 3% versus the 0.86% gain the S&P 500 (NYSEARCA:SPY) posted. Celgene is a global biopharmaceutical company engaged in the discovery, development and commercialization of therapies designed to treat cancer and immune-inflammatory related diseases.

On 24 Apr '14, the company reported first-quarter earnings of $1.67 per share, which beat the consensus analysts' estimates by $0.02. In the past year, the stock is up 18.6% and is beating the S&P 500, which has gained 13.23% in the same time frame. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to see if right now is a good time to purchase more of the stock for my portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 47.18, which is expensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 15.39 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (1.48), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 31.8%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 31.8%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 25.95%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

22Apr14

144.91

42.68

15.02

9.65

144

1.35

31.51

21May14

148.14

47.18

15.39

9.63

144

1.48

31.80

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Financials

On a financial basis, the things I look for in general are the dividend payouts, return on assets, equity and investment. The company does not sport a dividend to speak of, but is sporting return on assets, equity, and investment values of 10.7%, 24% and 15.4%, respectively, which are not that great of values. In this particular instance, I will forego the dividend aspect of the financials because the stock is in my growth portfolio; and in the growth portfolio, a stock does not have to have a dividend. Below is a comparison table of the financial metrics for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

22Apr14

0

0

11.5

25.8

15.4

21May14

0

0

10.7

24

15.4

Click to enlarge

Technicals

Click to enlarge

Here is a chart of Celgene indicating a head and shoulders pattern, a bearish pattern. I am by no means a chartist, but a head and shoulders, as described by Investopedia, has the following characteristics: 1) "price rises to a peak and subsequently declines. 2) Then the price rises above the former peak and again declines. 3) Finally, the price rises again, but not to the second peak, and declines again." The first and third troughs are considered shoulders, and the second peak forms the head.

From my experience of head and shoulders patterns, you figure out where the neckline is and measure half the distance to the top of the head to figure out how much further the stock is going to drop. The stock must break the neckline with "umph", though, meaning on large volume. It looks as if Celgene has done that, broken the neckline with strong volume. So taking $147 as the neckline (shown on the chart) and $170 as the top of the head, half that distance is $158.50. Taking the difference between $158.50 and $170, we get $11.5. So now, I would subtract $11.5 from $147 to get a target of $135.50 for the immediate future. It looks like the stock has hit that $135.50 target, making it seem like the downward movement is over. The neckline served as resistance and now acts as support against the triangle descending pattern where current resistance is $150. If the stock price breaches the support at $147, investors should look out below! I actually think it can get down to $124 in the short-term if it breaks the support level with high volume.

Recent News

  1. In late April, the stock was upgraded at Piper Jaffray. The upgrade was to an "overweight" rating citing the cooling down of biotech stocks, coupled with a 20x PE multiple and sustainable 20% earnings growth, making it a value play.
  2. On 24 Apr '14, the company reported earnings which beat on the bottom line but missed on the top line. Earnings were at $1.67 per share on revenue of $1.73 billion versus expectations of $1.65 per share on revenue of $1.77 billion.
  3. The company stated that net product sales increased by 19% from the prior year helped by Revlimid which increased 14% in sales ($1.14 billion), Abraxane increasing 51% ($185 million), but Vidaza decreasing by 27% ($148 million).

Conclusion

The whole biotech industry is just not getting any love whatsoever from Wall Street with every stock down since mid February. Fundamentally, this company is fairly valued on next year's earnings estimates and on earnings growth potential, but is exhibiting high near- and long-term earnings growth potential. Financially, the efficiency ratios have decreased from the prior quarter. Technically, the stock looks to have bearish technicals. Due to the bearish technicals, deteriorating financial efficiency ratios, and overall bad market sentiment for high growth stocks, I will not be adding a position right here. Don't get me wrong, I'm only getting bearish on the stock action, not the company as a whole. I will definitely be swooping in to nab some shares if it ever does see the $124 mark.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long CELG, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.