Over the past six months, Omnicell has been a great trade, beating the S&P 500 by 19.8%. Its stock price has climbed to $41.48, representing a healthy 26.4% increase. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Omnicell, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Omnicell Will Underperform?
We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons we avoid OMCL and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Omnicell grew its sales at a mediocre 5.8% compounded annual growth rate. This was below our standard for the healthcare sector.
2. Shrinking Adjusted Operating Margin
Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.
Looking at the trend in its profitability, Omnicell’s adjusted operating margin decreased by 9.2 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Omnicell’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its adjusted operating margin for the trailing 12 months was 7%.
3. 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 Omnicell, its EPS declined by 8.6% annually over the last five years while its revenue grew by 5.8%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
We cheer for all companies helping people live better, but in the case of Omnicell, we’ll be cheering from the sidelines. With its shares outperforming the market lately, the stock trades at 23.6× forward P/E (or $41.48 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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