# Biogen's Stock Also Suffers From Increasing Inventories And Receivables

## Summary

The company's cash conversion cycle is weakening by the quarter for the past six quarters.

Inventories and accounts receivables are building up big time while accounts payable have increased slightly, this is a formula for disaster.

The company needs to better manage their inventories and collecting what's owed to them.

The other day I was having a conversation with my buddy about cash conversion cycles and how he can use it to his advantage to build his business. It is basically a metric a company uses to see how they are doing in converting resources into cash. I gave him a couple of examples as Dell and Amazon and how they take orders from their customers, thereby receiving cash immediately then taking that cash and purchasing the items from their supplier to be able to ship to their customer in a short amount of time. By doing this not much is ever tied up in inventories for such companies because they have strong negotiating power over their suppliers.

This got me thinking about one of the stocks I own, specifically Biogen (NASDAQ:BIIB). Biogen is a big supplier to the healthcare industry which has a very poor cash conversion cycle because it has customers that lag on paying their bills. The thought that started running through my head was if Biogen is capable of dictating a cash conversion cycle to its suppliers, and obviously its customers.

We begin by basically evaluating the cash conversion cycle formula and determine the inputs from there. The formula is as follows:

Cash Conversion Cycle = DIO + DSO - DPO

Where DIO is Days Inventory Outstanding and calculated by the average inventory divided by cost of goods sold and multiplied by the days in the period. DSO is Days Sales Outstanding and is calculated by taking the average accounts receivable divided by the revenue and multiplied by the days in the period of evaluation. The final input of interest is the DPO, or Days Payable Outstanding which is calculated by taking the average accounts payable divided by the cost of goods sold and then multiplied by the days in the evaluation period.

The balance sheet and income statement must be looked at to determine all the inputs and with a little bit of math you can easily find out how a company's cash conversion cycle is looking. I've provided a table below for Biogen's cash conversion cycle during the past six quarters for illustrative purposes.

 Biogen 2014-06 2014-09 2014-12 2015-03 2015-06 2015-09 Inventory \$716 \$753 \$804 \$825 \$866 \$919 Cost of Goods Sold \$292 \$303 \$297 \$312 \$286 \$310 DIO (days) 221 224 244 238 273 267 Accounts Receivable \$1,002 \$1,091 \$1,292 \$1,390 \$1,311 \$1,328 Revenue \$2,421 \$2,511 \$2,641 \$2,555 \$2,592 \$2,778 DSO (days) 37 39 44 49 46 43 Accounts Payable \$225 \$234 \$229 \$236 \$283 \$251 Cost of Goods Sold \$292 \$303 \$297 \$312 \$286 \$310 DPO (days) 69 70 69 68 89 73 CCC (days) 189 193 218 219 229 237

Now what does it all mean? This shows the ability of management to manage the short-term assets and liabilities it holds on its balance sheet to be able to convert them into cash for the company. In this particular scenario with Biogen it is actually pretty high, meaning that it takes the company approximately 237 days to convert its products ultimately back to cash through sales. For comparison purposes Allergan has an average conversion rate of 86 days for the previous quarter! This means that Allergan is receiving cash for their products much quicker than Biogen and can be attributed to Allergan's cash related products such as Botox. The problem with Biogen is that the cash conversion has been increasing for each of the past six quarters.

So what's the trade you ask? Biogen can do a bit better by managing their inventories better but from a stock perspective the company currently trades at a trailing 12-month P/E ratio of 17.83, which is fairly 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 13.71 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are \$19.95 per share and I'd consider the stock inexpensive until about \$299. The 1-year PEG ratio (2.28), 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 expensively priced based on a 1-year EPS growth rate of 7.81%.

Thankfully the stock has moved up from off its lows but their days may be outnumbered if they don't do some sort of transformative transaction, stock buyback, or dividend. The company has nearly \$6 billion sitting in cash on the balance sheet which accounts for nearly 10% of the company's market cap. I do believe that the stock does offer value to investors as long as it is below \$367 but the management team needs to do something soon.