Cumberland Pharmaceuticals Inc (NASDAQ:CPIX), a USD$125.35M small-cap, operates in the healthcare industry, which faces key trends such as rising demand fuelled by an aging population and the growing prevalence of chronic diseases. Healthcare analysts are forecasting for the entire industry, a strong double-digit growth of 24.76% in the upcoming year , and a massive growth of 91.52% over the next couple of years. Not surprisingly, this rate is more than double the growth rate of the US stock market as a whole. Today, I’ll take you through the sector growth expectations, as well as evaluate whether CPIX is lagging or leading in the industry. Check out our latest analysis for Cumberland Pharmaceuticals
What’s the catalyst for CPIX’s sector growth?
Companies operating in the pharmaceutical sector are confronted with ways to improve R&D productivity, increase the efficiency of its operations, rationalise spending on sales and marketing and enhance financial performance. In the past year, the industry delivered growth of 7.76%, though still underperforming the wider US stock market. CPIX lags the pack with its earnings falling by more than half over the past year, which indicates the company will be growing at a slower pace than its pharmaceutical peers. As the company trails the rest of the industry in terms of growth, CPIX may also be a cheaper stock relative to its peers.
Is CPIX and the sector relatively cheap?
The pharmaceutical industry is trading at a PE ratio of 23x, relatively similar to the rest of the US stock market PE of 22x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a higher 16.15% compared to the market’s 10.06%, potentially illustrative of past tailwinds. Since CPIX’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge CPIX’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? CPIX has been a pharmaceutical industry laggard in the past year. If your initial investment thesis is around the growth prospects of CPIX, there are other pharmaceutical companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how CPIX fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If CPIX has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its pharmaceutical peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at CPIX’s future cash flows in order to assess whether the stock is trading at a reasonable price.