Is Catalent Stock A Buy?

Catalent Inc (NYSE:CTLT) used to be the pharmaceutical technologies and services (PTS) division of Cardinal Health. It spun off in 2007 and is now a component of the S&P 500 and a multinational health device and drug manufacturer, and distributor.

When the COVID-19 pandemic hit, it partnered with major vaccine-makers to assist in their development, so is Catalent stock a Buy?

The company’s growth in 2020 was a direct result of the federal government’s Operation Warp Speed, which granted “free money” to Pfizer (PFE), Johnson & Johnson (JNJ), AstraZeneca (AZN), and Moderna (MRNA) to develop their vaccines.

In fact, every country had its own version, and global corporations received a lot of that government funding to develop the COVID-19 vaccine.

The old saying is to get rich sell shovels during a gold rush, and Catalent provided manufacturing, vial filling, and packing services for each of these companies. It’s an unsung coronavirus hero whose fate is tied to the pandemic.

Will Catalent rise in value further?

Is Catalent Growth Sustainable?

Catalent has a wide range of medical treatments, pharmaceuticals, delivery technologies, gene therapies, and consumer healthcare products. The company has a wide network of manufacturing facilities and specializes in commercial and clinical packaging.

It creates everything from softgel capsules for drug delivery to an API software platform for clinics to store and access clinical data. It also gains approval from the Food and Drug Administration and other global medical regulatory bodies to prove efficacy of its treatments.

It’s a vertically and horizontally integrated company that offers a full suite of services across the entirety of a company’s operations.

Because it has a full medical supply chain, it does anything from design and manufacturing to biologics for clinical and pre-clinical studies, packaging, and distribution to pharmacies.

It has production facilities in the U.S., England, Italy, and China, and much of its revenue increases have been invested in expansion.

In spite of the international story, many bearish investors wonder if its growth streak is sustainable through the decade.

Is Catalent Stock A Buy?

Catalent Inc generated over $3 billion in revenue for its 2020 fiscal year from its product lines.

It generated $845.7 million in the first quarter of its 2021 fiscal year. This is a 27 percent increase from the prior year.

Biologics alone doubled in revenue to $377.1 million for the quarter. As coronavirus vaccine production ramps up, it will continue to see growth in this segment. That could last well into the mid-2020s. Whether it’s the coronavirus, flu, or cancer, diabetes, and heart attacks, medical technology will continue to improve.

Pre-tax earnings for the first fiscal quarter of 2021 were $174.4 million, which represents a 37 percent year-over-year increase.

There are risks associated with buying into the stock at this stage of the game though.

Catalent Is In The Basket Of “Pandemic Stocks”

Catalent Inc stock is trading this year at nearly twice its valuation before the pandemic began and four times what it was worth at the low of the coronavirus crash. Because of this, the success for the next two years may already be baked into the price.

So-called “pandemic stocks” like Catalent and Gilead (GILD) are trading at over 60 times earnings, compared to a 17x P/E ratio for Regeneron Pharmaceuticals, 23x for Pfizer, and 24x for Johnson & Johnson (JNJ). And many of these other pharmaceutical giants pay dividends.

It’s only a matter of time before partnership agreements run out and there is reduced need for ramped up production of the vaccine.

That doesn’t mean people are out of the woods yet. Mutations could be right around the corner. New strains of influenza and other viral infections pop up constantly. And there are a lot of treatments for long-standing ailments in the clinical trial pipeline.

Still, its ability to generate revenue may not coincide with investor sentiment. Once the economy reopens, festivals, cruises, and other social gatherings will inevitably continue. Some stocks are considered tied to the pandemic, while others are called recovery stocks.

If recovery stocks start to outweigh pandemic stocks, both Catalent and its competitors could be strangled.

How Will Catalent Competitors React?

Many of Catalent’s competitors are also its partners. Moderna (MRNA), Pfizer (PFE), and others could potentially bring manufacturing in-house once the initial surge for demand dies down.

On top of this, there are plenty of companies already in the game but not partnered with it, like Bristol-Myers Squibb (BMY), Gilead (GILD), and Regeneron (REGN).

Catalent already has debt on its books, but it grew to this size through acquisitions. It even spent $315 million in the lead-up to the outbreak for an Italian facility from BMS.

As times get tougher, expect to see more mergers and acquisitions from this segment, although it’s not clear which end Catalent will be on.

Is Catalent Stock A Buy? The Bottom Line

Catalent Inc is a vertically integrated global drug and medical technology company with a full supply chain. It partnered with major COVID-19 vaccine makers to create the packaging and drug delivery systems used. This made it a vendor of shovels in the viral gold rush.

Its luck may be limited though – many analysts agree that the effects of the pandemic will diminish over time. If another virus doesn’t strike by then, the company could find itself struggling to sustain the revenue streams to which it has become accustomed.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.