This Stock Looks Downright Cheap

So far, the Royalty Pharma (NASDAQ:RPRX) story has played out mostly the way I expected. If that continues, Royalty Pharma stock should have a nice rally ahead.

Back in June, I highlighted Royalty Pharma stock on my Moneyline podcast. Earlier that month, the company went public in the biggest initial public offering so far this year; the deal raised nearly $2 billion.

Investors initially bought the deal in a big way: within days, Royalty Pharma stock had doubled from its $28 IPO price.

And in the mid-$50s, I certainly liked the story.

RPRX’s portfolio of pharmaceutical royalties and its model of helping fund development through royalty acquisitions (much like a gold or silver streamer) looked innovative.

At those levels, I thought the stock was a bit too pricey, but recommended in early July that investors keep a close eye on the stock.

RPRX quickly retreated to $42, and after a rally has returned to those levels. Here, the long-term story is starting to look quite attractive.

The Story Improves

After all, in the two-plus months since the IPO, the RPRX story actually seems to have improved, for a number of reasons.

First, second quarter earnings were solid. What the company calls “adjusted cash receipts” — basically, the royalties received in the quarter — rose 24% year-over-year. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) rose 25%.

That type of growth potential is why Royalty Pharma stock soared so quickly after the IPO. At the least, the company delivered in Q2.

Second, the balance sheet is in better shape. Royalty Pharma refinanced its debt through a staggered $6 billion bond offering. Impressively, the weighted average interest rate is just 2.125%, even with maturities that extend as long as 2050. Clearly, the debt markets see the operating model as safe even over the ultra long-term.

Finally, Royalty Pharma has added to its portfolio. The company has announced two new royalty agreements just in the last few weeks: it has now executed an impressive $1.7 billion in funding so far this year. Three more drugs covered by royalties have received approval from the U.S. Food and Drug Administration, including one that treats breast cancer.

Again, I liked the story at the time of the IPO. I like it better now.

Royalty Pharma Stock Pulls Back

Meanwhile, RPRX stock now is cheaper than it was immediately after the IPO. In fact, it’s down about 25% from where it opened on its third day on the public markets.

There’s little, if any, justification for such a pullback. Again, the story is playing out the ways bulls hoped.

Certainly, optimism toward Royalty Pharma stock may have gotten a bit overheated soon after the IPO. But a current price 50% above the IPO price is hardly a stretch in a market where many new issues have doubled or better.

In fact, on this pullback, RPRX stock now looks downright cheap. A 16x multiple to 2021 analyst earnings per share estimates is hardly onerous.

This is a company that literally pioneered a way to fund life-saving treatments. It’s an innovative firm that dominates its market. 16x forward earnings seems awfully reasonable in that context.

Finding Support

To be fair, some investors might worry about a catalyst. Third quarter earnings aren’t on the way until November. FDA approval of additional drugs appears unlikely before next year.

But the technical picture here looks solid as well. Royalty Pharma stock found a bottom around these levels in late July, and support appears to be holding again. I’m not surprised that’s the case, but particularly with a nice bounce on Friday, investors waiting for a “better price” simply may not get one.

All told, there’s just a lot to like here. There’s an innovative model, a solid balance sheet, an attractive valuation, and support to the stock. I suggested investors keep an eye on RPRX in July. Now it looks it might be time to get more aggressive.

— Matt McCall

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Source: Investor Place