Over the past six months, Organon’s stock price fell to $7.77. Shareholders have lost 16.1% of their capital, which is disappointing considering the S&P 500 has climbed by 14.7%. This may have investors wondering how to approach the situation.
Is now the time to buy Organon, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Is Organon Not Exciting?
Even with the cheaper entry price, we don't have much confidence in Organon. Here are three reasons there are better opportunities than OGN and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Organon struggled to consistently generate demand over the last five years as its sales dropped at a 1.7% annual rate. This wasn’t a great result and is a sign of lacking business quality.
2. 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.
Sadly for Organon, its EPS declined by 17.6% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. Free Cash Flow Margin Dropping
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.
As you can see below, Organon’s margin dropped by 24.8 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Organon’s free cash flow margin for the trailing 12 months was 12.3%.
Final Judgment
Organon isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 2.1× forward P/E (or $7.77 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of our top digital advertising picks.
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