Collegium Pharmaceutical has had an impressive run over the past six months as its shares have beaten the S&P 500 by 10%. The stock now trades at $35.02, marking a 34.7% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Collegium Pharmaceutical, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free for active Edge members.
Why Is Collegium Pharmaceutical Not Exciting?
Despite the momentum, we don't have much confidence in Collegium Pharmaceutical. Here are three reasons we avoid COLL and a stock we'd rather own.
1. Fewer Distribution Channels Limit its Ceiling
Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.
With just $707 million in revenue over the past 12 months, Collegium Pharmaceutical is a small company in an industry where scale matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Collegium Pharmaceutical’s margin dropped by 2.7 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Collegium Pharmaceutical’s free cash flow margin for the trailing 12 months was 28.5%.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Collegium Pharmaceutical’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Collegium Pharmaceutical isn’t a terrible business, but it doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 4.8× forward P/E (or $35.02 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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