Investors observing the recent performance of DexCom Inc (DXCM, Financial) would note a daily loss of 9.91%, somewhat tempered by a modest three-month gain of 1.95%. With an Earnings Per Share (EPS) of 1.55, the question arises: is DexCom modestly undervalued? This analysis aims to delve into DexCom's valuation and provide insights into its true market value.
Company Introduction
DexCom designs and commercializes continuous glucose monitoring systems for diabetic patients, offering a modern alternative to traditional blood glucose meters. The integration of its CGM systems with insulin pumps from Insulet and Tandem for automatic insulin delivery represents a significant advancement in diabetes care. With a current share price of $124.34 and a market cap of $49.40 billion, we compare DexCom's stock price against the GF Value—an estimation of its fair value—to evaluate the stock's potential.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated using a blend of historical trading multiples, a GuruFocus adjustment factor based on the company's past performance, and future business performance estimates. This value serves as an ideal fair trading value for the stock. If DexCom's stock price hovers significantly above the GF Value, it could be overvalued, suggesting potential poor future returns. Conversely, a price well below the GF Value may indicate undervaluation and the prospect of higher future returns.
At present, DexCom (DXCM, Financial), with a GF Value of $159.82, appears modestly undervalued, suggesting that its stock may offer higher long-term returns than its business growth alone would indicate.
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Financial Strength Analysis
Investing in companies with robust financial strength is crucial to minimize the risk of capital loss. Examining the cash-to-debt ratio and interest coverage can provide valuable insights into a company's financial health. DexCom's cash-to-debt ratio of 1.05 is lower than 61.02% of companies in its industry. However, DexCom's overall financial strength has been rated a solid 7 out of 10 by GuruFocus, suggesting a fair level of financial robustness.
Profitability and Growth Prospects
Investing in profitable companies, especially those with a history of consistent profitability, generally carries less risk. Companies with high profit margins typically have better performance potential. DexCom has been profitable for five of the past ten years. With an operating margin of 16.5%, DexCom outperforms 80.37% of its peers in the Medical Devices & Instruments industry. This impressive profitability, coupled with revenue growth of 19.9% over the past three years, positions DexCom favorably within its sector.
Growth is a pivotal factor in a company's valuation, often directly correlated with long-term stock performance. A company that grows swiftly and profitably creates more value for its shareholders. DexCom's 3-year average EBITDA growth rate of 30.6% underscores its potential for continued value creation.
ROIC vs. WACC
An effective way to assess a company's profitability is to compare its Return on Invested Capital (ROIC) with its Weighted Average Cost of Capital (WACC). ROIC indicates how well a company generates cash flow relative to the capital invested, while WACC represents the average rate a company pays to finance its assets. Ideally, ROIC should exceed WACC. DexCom's ROIC of 18.98 is indeed higher than its WACC of 13.74, suggesting efficient capital management.
Conclusion
Considering its fair financial condition, favorable profitability, and strong growth, DexCom (DXCM, Financial) stock is assessed to be modestly undervalued. The company's performance in the Medical Devices & Instruments industry is quite promising, with growth outpacing the majority of its competitors. For a more detailed financial overview, interested investors can explore DexCom's 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
