What a fantastic six months it’s been for NeoGenomics. Shares of the company have skyrocketed 48.3%, hitting $9.94. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in NeoGenomics, 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 NeoGenomics Will Underperform?
We’re happy investors have made money, but we're cautious about NeoGenomics. Here are three reasons there are better opportunities than NEO and a stock we'd rather own.
1. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for NeoGenomics, its EPS declined by 3% annually over the last five years while its revenue grew by 10.4%. This tells us the company became less profitable on a per-share basis as it expanded.
2. Previous Growth Initiatives Have Lost Money
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).
NeoGenomics’s five-year average ROIC was negative 10.5%, meaning management lost money while trying to expand the business. Its returns were among the worst in the healthcare sector.
3. High Debt Levels Increase 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.
NeoGenomics’s $409.5 million of debt exceeds the $159.6 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $43.36 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. NeoGenomics could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope NeoGenomics can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies making people healthier, but in the case of NeoGenomics, we’re out. After the recent rally, the stock trades at 57× forward P/E (or $9.94 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d recommend looking at one of our top digital advertising picks.
Stocks We Would Buy Instead of NeoGenomics
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