What a time it’s been for Avantor. In the past six months alone, the company’s stock price has increased by a massive 89.4%, reaching $15.49 per share. 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 Avantor, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Avantor Will Underperform?
Despite the momentum, we’re sitting this one out for now. Here are three reasons why there are better opportunities than AVTR, plus one stock we’d rather own.
1. Core Business Falling Behind as Demand Declines
Investors interested in Research Tools & Consumables companies should track organic revenue in addition to reported revenue. This metric gives visibility into Avantor’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Avantor’s organic revenue averaged 1.9% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Avantor might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Shrinking Adjusted Operating Margin
Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.
Analyzing the trend in its profitability, Avantor’s adjusted operating margin decreased by 5.9 percentage points over the last five years. Even though its historical margin was healthy, shareholders will want to see Avantor become more profitable in the future. Its adjusted operating margin for the trailing 12 months was 13.4%.
3. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Avantor, its EPS declined by 7.8% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Final Judgment
Avantor doesn’t pass our quality test. Following the recent rally, the stock trades at 18.3× forward P/E (or $15.49 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 our favorite semiconductor picks and shovels play.
Stocks We Like More Than Avantor
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