Shareholders of Neogen would probably like to forget the past six months even happened. The stock dropped 36.5% and now trades at $10.42. This might have investors contemplating their next move.
Is now the time to buy Neogen, 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.
Even with the cheaper entry price, we don't have much confidence in Neogen. Here are three reasons why there are better opportunities than NEOG and a stock we'd rather own.
Why Do We Think Neogen Will Underperform?
Founded in 1982, Neogen (NASDAQ:NEOG) provides a broad range of products and services to ensure food safety and animal health, including diagnostic tests, food safety equipment, and veterinary pharmaceuticals.
1. 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, Neogen’s margin dropped by 26.5 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. Neogen’s free cash flow margin for the trailing 12 months was negative 10.2%.
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Neogen’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
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.
Neogen burned through $93.09 million of cash over the last year, and its $893.6 million of debt exceeds the $140.2 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Neogen’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Neogen until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We see the value of companies helping consumers, but in the case of Neogen, we’re out. After the recent drawdown, the stock trades at 18.9× forward price-to-earnings (or $10.42 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Like More Than Neogen
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