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Bear Of The Day: Allakos (ALLK)

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Allakos (ALLK - Free Report) is a Zacks Rank #5 (Strong Sell) and has missed earnings in each of its last two reports.  Earnings history is part of the Zacks Rank, but it is not the biggest influencer. Let’s take a deeper look in this Bear of the Day article.

Description

Allakos Inc. is a clinical stage bio-technology company. It discovers and develops therapeutic antibodies for the treatment of allergic, inflammatory and proliferative diseases. Allakos Inc. is based in CA, United States

Earnings History

The first thing I do when I look at stock is look to see if the company is beating the number.  This tells me right away where the market’s expectations have been for the company and how management has been able to communicate to the market.  A stock that consistently beats is one that has management communicating expectations to Wall Street that can be achieved.  That is what you want to see.

In the case of ALLK, I see four straight misses of the Zacks Consensus Estimate.  No one wants to see a company missing the estimate all the time… but there are different rules to biotech stocks.  That said, we can still look to the average surprise to see how much the analysts are off by.  For ALLK, I see a -16% average surprise.

The Zacks Rank does care about the earnings history, but it is much more heavily influenced by the movement of earnings estimates.

Earnings Estimates

The Zacks Rank tells us which stocks are seeing earnings estimates move higher or in this case lower.  For ALLK, I see estimates moving lower across the board.

This quarter has moved from a loss of 92 cents to a loss of $1.08.

Next quarter has seen a similar decrease from -$1.01 to -$1.16.

The Zacks Rank is more heavily influenced by the move in the annual numbers, and the movement is also negative for those numbers.

I see 2021 moving from -$3.93 to -$4.48 over the last 60 days.

The 2022 number has moved from - $5.63 to -$6.17 over the same time horizon.

Negative movement in earnings estimates like that are the reason that this stock is a Zacks Rank #5 (Strong Sell).

Valuation

Like I said before, biotechs trade under different rules.  They tend to lose money up front as the make new and useful drugs or treatments, and then if the drugs are successful, the earnings picture can change dramatically.  That makes it hard to value a biotech like this.  There is no PE, there really aren’t any sales and therefore there are no margins.  I see a 8.5x price to book and that is more than double the industry average of 3.2x.

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