Over the past six months, Exact Sciences’s stock price fell to $48.92. Shareholders have lost 12.1% of their capital, which is disappointing considering the S&P 500 has climbed by 5.8%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Exact Sciences, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Exact Sciences Not Exciting?
Even with the cheaper entry price, we don't have much confidence in Exact Sciences. Here are three reasons why we avoid EXAS and a stock we'd rather own.
1. Cash Burn Ignites Concerns
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.
While Exact Sciences’s free cash flow broke even this quarter, the broader story hasn’t been so clean. Exact Sciences’s demanding reinvestments have consumed many resources over the last five years, contributing to an average free cash flow margin of negative 4%. This means it lit $3.97 of cash on fire for every $100 in revenue.
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).
Exact Sciences’s five-year average ROIC was negative 15.3%, 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.
Exact Sciences’s $4.68 billion of debt exceeds the $786.2 million of cash on its balance sheet. Furthermore, its 11× net-debt-to-EBITDA ratio (based on its EBITDA of $347.5 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. Exact Sciences 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 Exact Sciences can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Exact Sciences isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 74.1× forward P/E (or $48.92 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. We’d suggest looking at the most entrenched endpoint security platform on the market.
Stocks We Would Buy Instead of Exact Sciences
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