United Therapeutics: Economics Support Compounding Ability

seekingalpha08-20

United Therapeutics Corporation remains a buy with strong growth potential and high returns on invested capital.Q2 FY'24 earnings show continued growth in sales and earnings, with upsides in its ...

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overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nUnited Therapeutics: Economics Support Compounding Ability\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-20 10:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4715749-united-therapeutics-stock-economics-support-compounding-ability><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>United Therapeutics Corporation remains a buy with strong growth potential and high returns on invested capital.Q2 FY'24 earnings show continued growth in sales and earnings, with upsides in its ...</p>\n\n<a href=\"https://seekingalpha.com/article/4715749-united-therapeutics-stock-economics-support-compounding-ability\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"AEON","symbol_name":"AEON Biopharma","start_time":0,"source_url":"https://seekingalpha.com/article/4715749-united-therapeutics-stock-economics-support-compounding-ability","article_id":"2460168970","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1220627489/image_1220627489.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2460168970","pubTimestamp":1724119249,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"United Therapeutics Corporation remains a buy with strong growth potential and high returns on invested capital.Q2 FY'24 earnings show continued growth in sales and earnings, with upsides in its Tyvas","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"AEON":"AEON Biopharma","ABIL":"Ability Inc","BK4139":"生物科技","UTHR":"美国联合医疗","BK4007":"制药","ROIV":"Roivant Sciences Ltd.","LU1571399168.USD":"ALLSPRING GLOBAL LONG/SHORT EQUITY \"IP\" (USD) ACC","LQDA":"Liquidia Technologies Inc","BK4532":"文艺复兴科技持仓","LU1699723380.USD":"ALLSPRING GLOBAL LONG/SHORT EQUITY \"AP\" (USD) ACC","PTGX":"Protagonist Therapeutics Inc"},"translate_title":"United Therapeutics：经济学支持复合能力","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ABIL":1,"AEON":1,"LQDA":1,"PTGX":1,"ROIV":1,"UTHR":1},"content_text":"United Therapeutics Corporation remains a buy with strong growth potential and high returns on invested capital.Q2 FY'24 earnings show continued growth in sales and earnings, with upsides in its Tyvaso segment.The company has started share buybacks and is on track to reach a $3 billion revenue run rate by FY'25, supporting a valuation of $400/share.   Pgiam/iStock via Getty Images Investment update In February 2023, I rated United Therapeutics Corporation (NASDAQ:UTHR) a buy here on Seeking Alpha and bought large quantities of UTHR stock for our long-biased portfolios here at Bernard. I rehashed the thesis two more times, in May '23, and the most recent in August. That publication, titled \"eyeing a re-rating to 12-13x P/E, growth more than justified\", detailed several bullish points to consider on UTHR. These all remain in situ today, including:  In Q2 FY'23 management expected Tyvaso's production capacity by around 250%, aiming for total sales growth of $4Bn by FY'25 ($1.12Bn implied from Tyvaso). To date sales + inventory growth matching in terms of scale + size, suggesting effecting work-through of inventories and converting sales to new cash flows. Growth CapEx trending higher over time with increasing commitments in the capital base to maintain its competitive position and grow. This is more than business-as-usual CapEX, and it is converting to this in earnings growth, as I'll discuss here today. That being said, the business does maintain high liquidity in cash + equivalents and thus hasn't got this cash 'at work', so when adjusting for this ROICs are abnormally high and persistent (+60%). I've chosen to penalize management's hoarding of this cash in this assessment by treating it as capital employed to reflect the opportunity cost. Even doing so, ROICs are >20% indicating the company's persistent competitive advantage. Plus, I'm not against the company holding large sums of cash given it needs to fund its pipeline assets + clinical programs and needs to be opportunistic on other high-return projects.  It's hard-to-replicate business advantages stem from 1) the strength of its patents and 2) the speed of innovation in which it converts its pipeline into sales + cash flows. UTHR has the highest pre-tax margins in the biotech industry at 48% evidencing these economic factors. Moreover, persistence in sales + operating earnings growth indicates uptake in user accounts in all of its core offerings (I spend a great deal going into these in the prior analyses). Valuations highly supportive, with the stock trading at 10.8x trailing earnings at the time, and my numbers called for a re-rating to ~13-14x. This has since happened (it trades at >14x trailing earnings) but is still <2.5x EV/IC and my view the opportunity is still wide as this business 1) produces exceptionally high returns on all capital operating in the business, 2) retains + recycles that cash into investments aimed at expanding its business, and 3) repeating the previous two points.  Following the company's Q2 FY'24 numbers my conviction is firm on this name and importantly, I'd point out that implied market expectations are still exquisitely low for a business, where, as the CEO put it on the call, \"double-digit revenue growth is the norm\". This growth is translating into economic gains in shareholder value above an opportunity cost of market capital. Net-net, I reiterate UTHR as a buy, revising targets to $400/share on the upside. Note: I don't discuss the potential overhang/underhang of the UTHR / Liquidia (LQDA) saga with the latter's Yutrepia label, which UTHR has been denied proceedings in US District Court. UTHR has since escalated the case to the Supreme Court, a hearing due for September. This doesn't change the fundamental economics of the business, although it might have a sentiment impact. Again, I do not discuss this here. Figure 1.   TradingView Q2 FY'24 earnings breakdown UTHR continues on the growth route and critically, sales + earnings are high in 'cash'. It did record quarterly sales of $715mm (+20% YoY) underscored by upsides in the core of its portfolio—in particular Tyvaso, Orenitram, Remodulin, and Unituxin. Figure 2. UTHR Q2 investor presentation The divisional breakdown is as follows:  Tyvaso put up $398mm of sales (+25% YoY) – this was fueled by 1) continued uptake of Tyvaso DPI, 2) increased pricing, + 3) higher commercial utilization after the implementation of the Part D redesign provisions under the Inflation Reduction Act (\"IRA\"). Management also reported record referrals + new patient starts on all its Tyvaso clinical programs. In my view, the growth potential and durability of the Tyvaso franchise is the one to keep most of the attention on – there's no revision to the growth targets outlined earlier. Orenitram revenues were +13% YoY to $107mm – sales were up due to pricing – Orenitram is priced per mg. and management successfully passed thru a modest increase in the avg. dose which was reflected at the top line. 5yrs post-launch Remodulin sales came to $147mm (+16% YoY) – management said all new subcutaneous starts get the Remunity pump, so I'm giving it high marks for this fairly seamless conversion of all subcutaneous treprostinil use to Remodulin through the Remunity pump. Finally, Unituxin generated $52mm in worldwide revenues, +17% YoY.  The company also has one of the most profitable work forces in the industry with >915K in TTM profit per employee [behind (PTGX), (ROIV) and (AEON)], but with its $3Bn run-rate in situ, this could be substantial sales/employee, as per the CEO on the call: .\"..now that we're knocking on the door of a $3 billion revenue run rate, that's $2 million per head for our knocking on the door of 1,500 people.\" Share buybacks started The company started buybacks in March '24, divided into two tranches, $300mm and $700mm. The final settlement of the $300mm tranche occurred in June. The second tranche's final settlement is expected in Q3, so this may or may not be a tailwind moving forward in terms of money flows ($700mm is set to flow through, 6.6% of current enterprise value). My view of the company's Q2 numbers is they were exceptionally strong and enhance conviction on the name. That it is on a $3Bn run rate by FY'25 can't be overlooked, and I see the ~30% cumulative growth this calls for translating to earnings at 1:1 and into ~25% growth in freely available cash to fund its pipeline assets. Embedded expectations fair with high compounding ability Embedded expectations are presently fair in my view, with the business selling at ~11x NOPAT and 2.4x EV/IC. The latter is quite a stretch from historical norms, but the fact is this business can retain and reinvest decent sums of capital to expand its operating asset base and produce more earnings power. The ramp on operating earnings (Figure 3) has only recently begun to be priced in at the market level (I've been calling for it for >18 months) and what's equally impressive is the growth is being produced on a less dense capital base (Figure 4). Figure 3.   Company filings, author Figure 4.   Company filings Earnings growth has been in situ for a while, so, other than the Q2 earnings, it is the economic earnings which see the business trade at higher market valuations. The fact is the company's economic profits are more prominent now and this commands higher valuations which, I believe, aren't unreasonable assumptions to carry forward (even with a fade to 2x, we're still compounding at nearly 100% more than FY'21-'22 levels). Figure 5.   Company filings, author Under my FY'24–'26E estimates (see: Appendix 1), a starter position of ~1,000 UTHR shares gets $21,443 in earnings power today. My view is it can reinvest ~15% of NOPAT each year at ~20-23%, projecting growth in earnings to $30,318 (~$30.3/share) providing 19% CAGR in earnings power. To me, this suggests a high margin of safety (41% total growth paying ~15x NOPAT). Figure 6. Author Based on these forward assumptions, the present value of discounted cash that can be produced for a private owner of the business, above a specified hurdle rate of 12%, then discounted at 12% gets us to a valuation of $408/share. Might I add these are tremendously high benchmarks to cover, and rather conservative estimates on UTHR sees it pass the benchmark here. The question for all value investors is to find businesses that outpace expectations – and my view here is 1) expectations are low, and 2) quality is high. Figure 7.   Author Risks to thesis Downside risks to the thesis include 1) management compressing ROICs <20% as this sees less cash production and a lower intrinsic business worth, 2) sales growth <10% for the same reasons, 3) competitors taking market share in its key segments, and 4) the broader set of macro risks that must be considered, mainly the inflation/rates axis. Investors must recognize these risks in full before proceeding. In short UTHR has the economics of a high-quality compounder that has an extensive reinvestment runway to deploy capital intelligently back into its operations to grow is enterprise at sustainable levels. Management persistently throws off high levels of cash on a capital base that is relatively stable and does not have heavy requirements for 'business-as-usual' capital. My view is the business is worth ~$400-$410 a share today on reasonably conservative assumptions out to FY'26E, where my modelling sees corporate fade of business returns at ~15% to the long-term industry average. Expectations are low, quality is high. Rate buy. Appendix 1.a   Author's estimates Appendix 1.  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