What a brutal six months it’s been for RadNet. The stock has dropped 25.8% and now trades at $56.46, rattling many shareholders. This might have investors contemplating their next move.
Is now the time to buy RadNet, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is RadNet Not Exciting?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why RDNT doesn't excite us and a stock we'd rather own.
1. Fewer Distribution Channels than Larger Competitors
Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.
With just $2.04 billion in revenue over the past 12 months, RadNet lacks scale in an industry where it matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.
2. Shrinking Adjusted Operating Margin
Adjusted operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D. It also removes various one-time costs to paint a better picture of normalized profits.
Looking at the trend in its profitability, RadNet’s adjusted operating margin decreased by 3 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. RadNet’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its adjusted operating margin for the trailing 12 months was 4.6%.
3. Breakeven Free Cash Flow Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
RadNet broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.
Final Judgment
RadNet isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 91.6× forward P/E (or $56.46 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
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