What a time it’s been for NeoGenomics. In the past six months alone, the company’s stock price has increased by a massive 138%, reaching $19.30 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 NeoGenomics, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is NeoGenomics Not Exciting?
Despite the momentum, we’re cautious about NeoGenomics. Here are three reasons you should be careful with NEO, plus one stock we’d rather own.
1. Fewer Distribution Channels Limit Its Ceiling
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 $766.3 million in revenue over the past 12 months, NeoGenomics is a small company in an industry where scale matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.
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? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
NeoGenomics’s five-year average ROIC was negative 10.1%, 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
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
NeoGenomics’s $448.4 million of debt exceeds the $145.5 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $49.08 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
NeoGenomics isn’t a terrible business, but it isn’t one of our picks. Following the recent surge, the stock trades at 73.3× forward P/E (or $19.30 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 suggest looking at one of our all-time favorite software stocks.
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