Issue #76: A High-Growth, High-Margin Biopharma And A Boring Utilities Company Adding On AI

Summary

Halozyme Therapeutics operates a business model focused on biopharmaceuticals. The company has signed licensing agreements with other international companies including Eli Lilly, Pfizer, Roche and Takeda, allowing it to earn substantial royalties. It has grown revenues at a CAGR of 40% since 2018, forecasting this growth to continue in the near future. While $HALOโ€™s share price has increased substantially over the last year, the consensus price target and its high gross margins show it may still have room to grow.

Itron is a long-standing tech company at the forefront of innovation within the utilities industry. With a focus on energy and water management systems, it has designed hardware and software that both leverage smart technology like analytics and AI. While its earnings have fluctuated between net income and loss, Itron has recorded positive free cash flow nearly every year since 2002. The company targets growth that sees it consistently growing revenues and earnings in the next few years.


Halozyme Therapeutics ($HALO)

$43.82 – Share price at time of writing

Source: tradingview.com

Summary:

  • Share price at the time of writing: $43.82
  • Halozyme Therapeutics operates in the biopharmaceuticals industry. It constantly innovates to create more products used in treatments for different conditions.
  • Halozyme has grown revenues at a CAGR of 40% since 2018. It generates the majority of its revenues from royalties.ย 
  • The biotech industry is set to grow at a staggering CAGR of 14% from now to 2032.ย 
  • The consensus analyst price target for $HALO shows it may still have potential to grow.

What they do:

Halozyme Therapeutics ($HALO) operates a unique business model primarily focused on biopharmaceuticals. Its business strategy leverages enzyme technology to enhance drug delivery and efficacy, particularly in the fields of oncology, cancer and rare diseases. Two of its biggest brands are ENHANZE and Hylenex.

Halozyme mainly distributes its products through pharmacies, clinics, hospitals and government agencies. While Halozymeโ€™s proprietary products are only approved within the US, the company has signed licensing agreements with other international companies including Eli Lilly, Pfizer, Roche and Takeda. This has led to its technology being used in products distributed all over the world. 

The company earns revenues in three segments:

  • Product sales: Includes the sales of its proprietary products, sales of its enzyme (rHuPH20) to partners and sales of its devices.
  • Royalties: Royalties earned from its collaborations and license agreements with other companies and from products co-formulated with ENHANZE.
  • Revenues under collaborative agreements: Includes upfront license fees received, device licensing and development revenues and revenues earned from sales-based and event-based milestones.

Since its founding in 1998, Halozyme has grown to become a healthcare leader in its field. Its technology has now reached over 800,000 patients worldwide and Halozyme continues to sign collaborative agreements with healthcare companies to further extend its reach. Some of its ventures in the last six months include a co-formulated therapy with Takeda Pharmaceuticals and another one with Acumen Pharmaceuticals. 

What the market is saying:

While $HALO doesnโ€™t get discussed too frequently, it does see mentions across different forums. The topics are generally around $HALOโ€™s price action and the fundamentals of the company.

Source: quiverquant.com

A recent comment from Reddit:

โ€œSince March 16, 2004, Halozyme Therapeutics’s market cap has increased from $8.10M to $4.93B, an increase of 60,760.43% !!!!!!!! โ€

  • Brief_Noise6378

Why $HALO could be valuable:

Industry

Halozyme primarily operates within the biotechnology industry, more specifically in pharmaceutical manufacturing. Based on its latest annual report, Halozymeโ€™s products are used in a variety of applications. Its proprietary products include medication for testosterone replacement and for medical absorption. Its partner approved products are used in treatment for multiple types of cancer and in immunology treatments. Its devices are used in different cases including for anaphylaxis (allergies), osteoporosis and arthritis. 

This means that within the broader biotech industry, Halozyme has been able to diversify its revenue streams to different areas. This diversification implies that Halozyme does not have to rely on a single area for growth, nor will it encounter a massive threat to its overall operations if one area sees weakening demand.

However, the latter may have less cause for concern. According to forecasts, the biotech industry is set to grow at a staggering CAGR of 14% from now to 2032. This growth is expected to be driven by demand for constant innovation, increased healthcare needs for an aging population and higher capital injected towards research and development.

Financials

$HALO has recorded double-digit revenue growth since 2018. Over this time, its total revenues jumped from $152m to $830m last year, which equates to a CAGR of 40%. Its latest quarterly earnings continue to show growth, with Halozyme now providing guidance of total revenue reaching a high of $985m this 2024.

$HALO TTM revenues per quarter from 2019 to 31 March 2024:

Source: macrotrends.com

While $HALO recorded profitability for the first time in 2017, it only began recording consistent profitability from 2020. While its net income has not shown a clear upward or downward trajectory, the company believes that itโ€™ll record an earnings growth of up to 41% this year.

$HALO TTM net income per quarter from 2019 to 31 March 2024:

Source: macrotrends.net

Looking at $HALOโ€™s margins provide an interesting insight for a biotech company. Despite selling its own proprietary products, Halozyme gets the bulk of its revenues from royalties. Unsurprisingly, this has led to Halozyme being able to boast an average 70% gross profit margin โ€“ a margin at a level that tends to be around highly scalable business models such as software companies. This may explain why Halozyme has signed several licensing and collaborative agreements in the last few years.

$HALOโ€™s balance sheet shows no concern for the short run. And as at 31 March 2024, $HALOโ€™s short-term assets value over six times than of its short-term liabilities. In fact, the company announced a new $750 million share buyback program in February. However, it is important to note that $HALO currently holds a substantial amount of long-term debt totalling over $1.5 billion. High levels of debt not only adds to long-term solvency concerns, but also to high interest payments that may affect the companyโ€™s ability to operate and invest. 

Price action

Halozyme has recorded a 17.2% share price growth year-to-date and very recently hit its 52-week high. The consensus analyst price target for $HALO is currently set at $51.44, representing potential upside of over 17% from its current price.

What the risks are:

1๏ธโƒฃ Long history of unprofitability: While $HALOโ€™s financials have grown tremendously in the last few years, it spent the majority of its history being unprofitable.ย 

2๏ธโƒฃย Unsuccessful trials: $HALO invests heavily into research and development and can face substantial losses if its products are unable to perform as desired. Just a few years ago, Halozyme saw one of its trials fail and it subsequently had to cut 55% of its workforce.

3๏ธโƒฃ High level of intangible assets: As at 31 March, $HALO intangible assets made up over 46% of the company total assets. High intangibles can be a cause of concern, as intangible assets generally cannot directly generate revenues.

Bottom line: Halozyme Therapeutics is a fast-growing biopharmaceutical company. It engages in the research and development of drugs used for treatments in oncology, immunology and rare diseases, among several others. It generates the majority of its revenues from royalties and collaborative partnerships, but also distributes its own proprietary products. It has grown its revenues by an average of 40% a year since 2018, and it expects to continue growing in the near future. Consensus price targets show potential upside to $HALOโ€™s share price.


Itron ($ITRI)

$109.54 – Share price at time of writing

Source: tradingview.com

Summary:

  • Share price at the time of writing: $109.54
  • Itron has a long history of being at the forefront of energy and water management innovation.
  • Itron revenues have trended between the range of $1.8 billion to $2.5 billion since 2011, and it has fluctuated between net income and net loss.ย 
  • However, its recorded positive free cash flow nearly every year since 2002. The only years it didnโ€™t was due to massive cash acquisitions.
  • Itron targets growth that will finally see it break past its revenue range.ย 
  • $ITRI is up over 60% in the last 12 months. The consensus analyst price target shows that $ITRI is close to its fair value.

What they do:

Itron is a long-standing tech company that was founded back in 1977. The company makes innovative systems that boost efficiency, connect communities, and help customers manage their energy and water resources better. Itron’s platform combines data analytics and services that assist establishments in managing resources effectively and responsibly. Itron’s solutions tackle various issues like rising resource demand, environmental compliance and integrating renewable energy sources.

Itron operates globally under three segments: 

  • Device Solutions: focuses on hardware products for measurement, including gas, electricity and water meters.ย 
  • Networked Solutions: this segment supports Industrial Internet of Things (IIoT) applications like automated meter reading, advanced metering infrastructure, distributed energy resource management and smart street lighting.
  • Outcomes: provides enhanced software and services using AI and machine learning to improve decision-making and efficiency for utilities and smart cities. These offerings are often recurring and support high-value use cases such as grid operations, energy forecasting and consumer engagement.

While the above are Itronโ€™s operating segments, the company simplifies its revenue model into just two segments: product revenues and service revenues. The greater majority of its revenue is derived from its products, with its Networked Solutions segment contributing the most.

Itron has been making headlines in recent years thanks to its projects around bringing AI into the utilities industry. Its most recent development was the integration of Microsoft Azureโ€™s OpenAI service to its utility data platform.

What the market is saying:

$ITRI gets several mentions on public forums, however the discussion centers mainly on its products and services. The stock itself does not get discussed too frequently, however when it does, the topic tends to focus on its technicals.

Source: quiverquant.com

A recent comment from Reddit:

โ€œTFor ‘ITRI’, the next resistance is at +/- $122, which is slightly less than 2R and for ‘FTI’ I’m considering the next resistance level at $32, which is more than 3R with the current setup.โ€

โ€“ Organic_String_5286

Why $ITRI could be valuable:

Industry

Itron operates in the energy and water management industry within the broader utilities industry. The company focuses on smart city applications and the Industrial Internet of Things (IIoT). 

Utilities is generally considered a defensive industry โ€“ meaning it tends to be less sensitive to changes in the business cycle due to being an everyday necessity. The industry itself is not exactly slated for substantial growth, given that itโ€™s more mature. 

For Itron however, its investments into growing the technology within the utilities industry has put it at the forefront of energy and water management innovation. Its key products aim to maximize operational efficiency through smart hardware and software. This is in line with the key drivers that are expected to drive growth in the utilities and industrial industries.

And with its aim of adding in the capabilities of AI into its offerings as well, some even consider $ITRI to have the characteristics of both a defensive and growth stock.

Financials

$ITRI has been publicly listed since 1993 and had shown consistently growing revenues up until 2011. Since then, its annual revenues have trended between the range of $1.8 billion to $2.5 billion.

Itronโ€™s annual revenue from 1995 to 2023:

Source: stockanalysis.com

Itronโ€™s total earnings have fluctuated between a net income and a net loss. Last year, it recorded its highest net income since 2012. This partly was a result of higher gross profit margins thanks to an increased proportion of revenues coming from royalties.

Itronโ€™s TTM net income per quarter from 2009 to 2024:

Source: macrotrends.net

Itronโ€™s most recent earnings report shows that it aims to grow revenues by between 5% to 7% annually to reach $2.6-$2.8 billion by 2027. Additionally, the company also targets a higher gross profit margin between 36 to 38% by then โ€“ up from 32.8% last year. This is in line with consensus analysts estimates from S&P Global, which forecasts both growing revenues and earnings in the next four years.

Looking at its most recent balance sheet, Itron boasted a hefty current assets balance of nearly $1.1 billion โ€“ almost double its current liabilities. This means that Itron is less likely to face liquidity problems in the short run. 

It is in Itronโ€™s cash flow statements that show the most positive signs. Despite fluctuating between net income and net loss in the last few years, Itron has actually recorded positive free cash flow for the majority of years since 2002. There were only four years in that time frame where Itron didnโ€™t, and those were years where it recorded relatively large cash acquisitions.

Price action

$ITRI is currently up 61% over the last year and has been trending close to its all-time high. The consensus analyst price target is $111, which means that $ITRI might just be about fairly valued as it is now.

What the risks are:

1๏ธโƒฃ High level of Goodwill: $ITRI has had several acquisitions in its history so itโ€™s unsurprising that it has a high value of Goodwill in its balance sheet. Goodwill was valued at almost half of Itronโ€™s total assets in its latest balance sheet.

2๏ธโƒฃ Stagnating growth: $ITRI previously saw a long period of consistent revenue growth. Since then, it has seen revenue fluctuate within a similar range for over a decade.ย 

3๏ธโƒฃ Heavy insider selling: $ITRI has seen a disproportionate level of insider selling since the start of the year from multiple executives. While they may just be seeking to capitalize on its recent share price growth, itโ€™s also not the best sign for the stock.

Bottom line: Itron has a long history of being at the forefront of energy and water management innovation. While it operates in the defensive utilities industry, its research and development shows characteristics of being a growth company thanks to constant innovations. Its revenues have stagnated at a certain level for over a decade now, but Itron targets growth in the next few years that if fulfilled, will see it break into a new level.

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