3 Reasons to Sell JAZZ and 1 Stock to Buy Instead
What a time it’s been for Jazz Pharmaceuticals. In the past six months alone, the company’s stock price has increased by a massive 46%, reaching $200.71 per share. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Jazz Pharmaceuticals, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Jazz Pharmaceuticals Not Exciting?
We’re glad investors have benefited from the price increase, but we're cautious about Jazz Pharmaceuticals. Here are three reasons there are better opportunities than JAZZ and a stock we'd rather own.
1. Lackluster Revenue Growth
We at StockStory place the most emphasis on long-term growth, but within healthcare, a stretched historical view may miss recent innovations or disruptive industry trends. Jazz Pharmaceuticals’s recent performance shows its demand has slowed as its annualized revenue growth of 5.5% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs. 
2. Shrinking Adjusted Operating Margin
Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.
Analyzing the trend in its profitability, Jazz Pharmaceuticals’s adjusted operating margin decreased by 26.8 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 16.3%.
3. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Jazz Pharmaceuticals, its EPS declined by 8% annually over the last five years while its revenue grew by 11.4%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Jazz Pharmaceuticals isn’t a terrible business, but it isn’t one of our picks. Following the recent rally, the stock trades at 8.4× forward P/E (or $200.71 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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