grifols stock

Grifols Stock Analysis – Great Business But a Bit Expensive at 37 Times Earnings

Grifols Stock – Nasdaq: GRFS

Grifols stock analysis is part of a series of analyses I made on growth stocks that compound over time. The best stock out of the list to invest in was Visa. You can check my Visa stock article and also the tool best used to analyze the risk and reward when it comes to growth stocks, the delta of the delta.

Grifols, S.A. is a Spanish multinational pharmaceutical and chemical manufacturer. Principally a producer of blood plasma-based products, a field in which it is the European leader and largest worldwide, the company also supplies devices, instruments, and reagents for clinical testing laboratories.

Grifols is another compounder, the 2011 acquisition of Talecris, 2014 acquisition of Novartis’ blood and plasma diagnostics, and the 2017 Hologic acquisitions have strengthened Grifols’position in the US blood plasma market.

The acquisitions increased revenues 5 times, but as many were made through share issuances, earnings increased only 3 times over the past decade.

Grifols stock financials
Grifols stock financials

Grifols financials Source: Grifols – Morningstar

The big risk here is competition in the plasma business, it is an oligopoly but you never know when will someone start chipping away those strong margins, after all, it is plasma.

It is a family owned business as the Spanish Grifols family owns about 40% of the voting shares.

The stock did amazingly over the past decade and it is actually an example of what to look for.

Grifols stock price
Grifols stock price

Grifols stock price

From 2009 to 2012 earnings were around €0.3 while the stock range was from €4 to €6 with the PE ratio fluctuating between 10 and 20. The company made acquisitions, there was no dividend but the shareholders got rewarded eventually with the stock being up almost 10 times. So, this is exactly what I look for, a good business in a sector with tailwinds, oriented towards long-term growth and one that can scale on its current infrastructure as Grifols did. Plus, at some moments it had a PE ratio of just 10.

Grifols stock valuation

Now it has a PE ratio of 37 as investors are exuberant, but if you can find such a business before it explodes on the upside, then you have a gem in your portfolio. Even if you diversify among 10 such businesses, if 2 go bust, 6 do nothing and 2 go up 10 times, your initial portfolio of 100 turns into 260 over 10 years which is a good 10% return.

As you are picking among good businesses, if you get 3 right and those increase 10 times, while one less goes bankrupt, your initial 100 investment turns into 360, for a 13.6% yearly return. This is what compounders do.

In the current market, with PE ratios closer to 40 for good compounding businesses, it will be hard to find cheap compounders, but we will not stop looking. In any case, the research knowledge that we get by looking at such quality businesses over time, is something that definitely compounds and you never know when the market will reward our patience and offer us great businesses on the cheap.

Given the PE ratio of 37, a lot of growth based on future expectations is already price in which makes investing in Grifols risky at this moment in time. In 2011, when the stock price was at €4, the book value was at €3. The book value now is at €7.73 while the stock price is at €30. The stock structure is a bit complex with class A, class B shares and two different ADRs (American Depository Receipts). No need to dig deep into that as the stock is currently too expensive anyways for my taste.

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