Biological and pharmaceutical company Catalent (NYSE:CTLT) has had a really difficult ride over the past year. Down 46.99 percent in 12 months, the stock has cratered as revenues and earnings driven by the medical demands of the COVID-19 pandemic dried up.
Recently, however, Catalent has seen a small bounce in its share price. In the past month alone, the stock has advanced 7.53 percent. So why is Catalent share price up?
Let’s get to know Catalent to understand what’s sparking the recent rally.
Catalent is a contract developer and manufacturer of biological and pharmaceutical products. One of its key product categories is oral soft gels, which it develops for a variety of both prescription and over-the-counter medications.
Catalent also develops gene and cell therapy solutions for clinical use. According to Catalent’s self-reported metrics, the company is involved in the manufacturing of more than 8,000 products and participates in more than 1,000 partner programs.
Why Did Catalent Stock Go Up?
One of the main factors in Catalent’s recent rise was better-than-expected revenue in its quarterly earnings report.
The most recent quarter saw total revenue of $1.07 billion, compared to analyst expectations of $1.05 billion. This revenue beat did, however, come with an asterisk attached. Although Catalent outperformed expectations, its revenues were still 17 percent lower than in the same quarter a year ago.
Another driver of Catalent’s increasing share prices is the recently announced involvement of activist firm Elliott Investment Management.
Elliott placed four new members on the board of Catalent, giving it a great deal of say in the future activities of the company. Thanks to its internationally recognized prowess as an activist fund, announcements of Elliott’s involvement with a company tend to result in short-term increases in share prices.
A final piece of the puzzle is Catalent’s relatively positive forward guidance. For FY2024, the company projects total revenues of $4.3 to $4.5 billion and an adjusted EBITDA in the range of $680-760 million.
This would represent a massive improvement against FY2023’s adjusted EBITDA, which totaled just $139 million and was down 61 percent from 2022.
Analysts Forecast Catalent Shares Hit $50
Analysts currently project Catalent shares to reach a median target price of $50 over the next 12 months. This represents a 3.5 percent increase compared to the most recent price of $48.29. This could put the stock in a position to considerably underperform the broader market.
Catalent may also be overvalued at its current price. At 55 times forward earnings, the stock is priced with the expectations of high future growth ahead.
Barring a meaningful turnaround brought about by Elliott Management’s involvement, Catalent appears to trade at a price that is not justified by its underlying fundamentals.
Poor Earnings Hurt Catalent
At the core of Catalent’s risks are its poor profitability metrics. The company’s net margin over the trailing 12-month period has averaged -5.4 percent, resulting in a full-year loss of $1.30 per share.
In addition, Catalent’s return on equity is just 3.2 percent. Without sharp improvements in profitability, Catalent’s resurgence may prove to be short-lived.
Debt is another concerning factor for Catalent investors. With a debt-to-equity ratio of 0.93, the company is carrying a debt load that may prove to be a liability. Catalent’s interest coverage ratio of 0.4 also calls into question its ability to pay its debts if its earnings do not improve as expected.
Finally, there’s a case to be made that Catalent may never achieve the same results it did during the COVID-19 pandemic.
Prior to the pandemic, the company’s net margins averaged 3-6 percent for several years. The pandemic and the increased business it brought in pushed Catalent’s margins into double-digit territory for the first time since 2015.
As such, Catalent may not be able to produce similar results in a normal operating environment.
The Bull Case for Catalent
Needless to say, there are also more positive arguments to be made for Catalent. The bull case for the stock hinges on the argument that Catalent is in a transitional phase following the COVID-19 pandemic. The company is rapidly shifting its focus toward biologics and gene therapy products, both of which could help replace some of the lost COVID-era revenues.
Catalent could also benefit from the experienced leadership brought on board by Elliott Management. Essential cost-cutting measures, for example, could help Catalent clean up its balance sheets and reduce its debt load while bolstering profitability. New board guidance could be especially helpful as Catelent reinvents itself.
Catalent has a large pipeline of potentially valuable drugs in development. Chief among these are multiple drugs targeting anxiety disorders, including at least one experimental psilocybin-based drug. The ongoing development and eventual commercialization of these drugs could support further growth at Catalent over the next several years.
Finally, analysts do expect significant earnings improvements from Catalent in the near future. Over the next 12 months, adjusted earnings are projected to more than double to $1.58. On a 5-year horizon, Catalent’s expected earnings growth rate is 20.1 percent.
Is Catalent a Buy Today?
While Catalent does have some appealing features, its financial position, low profitability and need to transition toward new sources of income to make up for the recession of the COVID-19 pandemic makes it a fairly risky investment. These problems are further compounded by the fact that Catalent’s current price assumes very high levels of future growth.
Overall, Catalent does not appear to be a good buy at today’s prices. Shareholders who already own the stock, however, may be well-served by holding in hopes of higher share prices going forward.
Given that the stock is already down more than 45 percent over the past year, these shareholders could pare their losses by continuing to hold onto shares.
For those who do not already own Catelent, however, there are likely less risky investments with higher potential returns available in the current market.
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.