ARCA biopharma Inc (NASDAQ:ABIO), a USD$14.69M small-cap, is a healthcare company operating in an 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 relatively muted growth of 9.04% in the upcoming year , and a massive growth of 49.33% 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 will analyse the industry outlook, as well as evaluate whether ABIO is lagging or leading in the industry. See our latest analysis for ABIO
What’s the catalyst for ABIO’s sector growth?
Data analytics and other technology-enabled approaches are creating opportunities for innovations, however, stakeholders have been challenged to keep abreast of this structural shift while under pressure to cut costs. Over the past year, the industry saw growth in the teens, beating the US market growth of 11.06%. ABIO lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means ABIO may be trading cheaper than its peers.
Is ABIO and the sector relatively cheap?
The biotech industry is trading at a PE ratio of 29x, higher than the rest of the US stock market PE of 19x. This illustrates a somewhat overpriced sector compared to the rest of the market. However, the industry did return a higher 16.06% compared to the market’s 10.46%, which may be indicative of past tailwinds. Since ABIO’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge ABIO’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? ABIO has been a biotech industry laggard in the past year. If your initial investment thesis is around the growth prospects of ABIO, there are other biotech companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how ABIO fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If ABIO 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 biotech 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 ABIO’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into ARCA biopharma’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other healthcare stocks instead? Use our free playform to see my list of over 1000 other healthcare companies trading on the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.