What a fantastic six months it’s been for Neogen. Shares of the company have skyrocketed 53.5%, hitting $9.46. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Neogen, 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 Do We Think Neogen Will Underperform?
We’re happy investors have made money, but we don't have much confidence in Neogen. Here are three reasons why NEOG doesn't excite us and a stock we'd rather own.
1. Revenue Tumbling Downwards
Long-term growth is the most important, but within healthcare, a stretched historical view may miss new innovations or demand cycles. Neogen’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 3.2% over the last two years.
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Neogen’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. Restricted Access to Capital Increases Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Neogen posted negative $518.8 million of EBITDA over the last 12 months, and its $793.8 million of debt exceeds the $159.9 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
We implore our readers to tread carefully because credit agencies could downgrade Neogen if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope Neogen can improve its profitability and remain cautious until then.
Final Judgment
We see the value of companies making people healthier, but in the case of Neogen, we’re out. Following the recent surge, the stock trades at 37.7× forward P/E (or $9.46 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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