NeoGenomics trades at $9.78 per share and has stayed right on track with the overall market, gaining 24.7% over the last six months. At the same time, the S&P 500 has returned 21.3%.
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Why Do We Think NeoGenomics Will Underperform?
We're sitting this one out for now. Here are three reasons we avoid NEO and a stock we'd rather own.
1. 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.
NeoGenomics’s earnings losses deepened over the last five years as its EPS dropped 78.5% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, NeoGenomics’s low margin of safety could leave its stock price susceptible to large downswings.
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 10.1%, 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
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 $410.3 million of debt exceeds the $164.1 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $41.85 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 cheer for all companies helping people live better, but in the case of NeoGenomics, we’ll be cheering from the sidelines. That said, the stock currently trades at 32.6× forward EV-to-EBITDA (or $9.78 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 one of our top digital advertising picks.
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