Amneal currently trades at $16.70 and has been a dream stock for shareholders. It’s returned 283% since July 2021, blowing past the S&P 500’s 72.3% gain. The company has also beaten the index over the past six months as its stock price is up 26.6%.
Is now the time to buy Amneal, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Amneal Not Exciting?
We’re glad investors have benefited from the price increase, but we’re cautious about Amneal. Here are three reasons you should be careful with AMRX, plus one stock we’d rather own.
1. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Amneal’s revenue to rise by 2.6%, a deceleration versus its 8.7% annualized growth for the past five years. This projection is underwhelming and indicates its products and services will see some demand headwinds.
2. Free Cash Flow Margin Stuck in Neutral
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.
As you can see below, Amneal’s margin was unchanged over the last five years, showing it couldn’t improve. Its free cash flow margin for the trailing 12 months was 8.9%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Amneal historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.9%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.
Final Judgment
Amneal isn’t a terrible business, but it doesn’t pass our bar. With its shares topping the market in recent months, the stock trades at 18.4× forward P/E (or $16.70 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at one of our all-time favorite software stocks.
Stocks We Would Buy Instead of Amneal
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