PDL Biopharma is a biotech company that develops drugs for cancer and immunologic diseases. The company typically enters into agreements with other larger firms for the marketing and distribution of these products.

PDL has an average five-year operating margin of 86%, noticeably higher than the sector’s average of 15%. Analysts expect earnings growth above 20% this year.  

Based on a comparison of free cash flow (operating income minus capital expenditures) against net income, PDL is delivering sustainable growth. Whenever free cash flow  far exceeds net income (as it has for PDL in recent years), that tells us the company has the cash flow available to invest or pay out dividends. 

(In contrast, anytime you see net income greater than free cash flow, the company is likely using non-cash items (like depreciation) to improve earnings. That’s an unsustainable financial maneuver .)   

PDL’s ratio of debt to equity has been improving steadily over the past five quarters, while return on equity (ROE), which had been negative in the past, seems to be on an improved path over the past three quarters. PDL’s growth in share price and earnings per share (EPS) has been a bit erratic, but overall, EPS growth has exceeded the growth in its share price.

PDL appears financially strong. With a trailing price-to-equity (P/E) ratio of 5.4  and a P/E-to-growth (PEG) ratio of 0.3, PDLI is significantly cheaper than its industry average P/E of 32 and the S&P 500’s average P/E of 15, offering an extremely attractive valuation while paying a 6% yield.

SouFun runs China’s leading Web-based real estate and housing business. SFUN’s five-year average operating margin is 46%, 3 percentage points higher than its sector average . Analysts expect earnings growth of better than 20% a year over the next five years. But while free cash flow exceeded net income in 2013, the prior years’ net income was greater. So this company appears on the right path, but the trend hasn’t yet shown to be sustainable.  

SFUN’s balance sheet is not strongly rated. Its debt-to-equity ratio has increased steadily over the past four quarters while its ROE has been declining.  

Lastly, SFUN’s share price has far exceeded its growth as the market has gotten ahead of itself with its expectations. Although the stock offers a 4.4% dividend yield, the lack of strength in the balance sheet and the aggressive valuation point to holding off on making an investment in this stock.

On the other hand, Fortress has vastly different results. While this firm’s expected earnings growth for this year is unimpressive at mid-single digits, EPS is forecast to grow at a whopping 50% a year for the next five years. This appears achievable based on its free cash flow and net income, which have improved continuously since 2010. Fortress’ debt to equity has shown a strong trend in that time, decreasing while ROE has improved. However, the debt ratio rose in the first quarter, which is something to watch.

Fortress’ share price and EPS growth have trended upward together, with shares less volatile than EPS.

Trading at a trailing P/E of 9.6 and a forward P/E of 8 with a price-to-book (P/B) ratio of 2.5, FIG appears cheap relative to its peers and the market. Its 4.2% dividend yield provides added return while investors wait for the market to catch on to the expected growth trend.