Since October 2021, the S&P 500 has delivered a total return of 67%. But one standout stock has doubled the market - over the past five years, RadNet has surged 135% to $72.85 per share. Its momentum hasn’t stopped as it’s also gained 25.8% in the last six months thanks to its solid quarterly results, beating the S&P by 18.3%.
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Why is RadNet not exciting?
Despite the momentum, we’re cautious about RadNet. Here are three reasons why RDNT doesn’t excite us, plus one 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 RadNet, its EPS declined by 7.8% annually over the last five years while its revenue grew by 12.7%. This tells us the company became less profitable on a per-share basis as it expanded.
2. Mediocre free cash flow margin limits reinvestment potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
RadNet has shown mediocre cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 1.9%, below what we’d expect for a healthcare business.
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).
RadNet historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.7%, somewhat low compared to the best healthcare companies that consistently pump out 25%+.
Final judgment
RadNet isn’t a terrible business, but it doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 120.9× forward P/E (or $72.85 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks we would buy instead of RadNet
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