CYRX - Cryoport: Revising To Hold After Major Changes To Forecasts Sentiment

2023-07-14 09:05:33 ET

Summary

• Cryoport released preliminary Q2 results, projecting sales to fall behind The Street's estimates.
• Lower demand for Cryoport's capital equipment and delays in initiating clinical trials are key reasons behind the changes.
• Management remains optimistic, but the investment facts do not corroborate a buy rating at this point in time in my view.
• Revised CYRX rating to hold until positive catalysts for price change emerge.

Cryoport Stock - Investment Briefing

Cryoport, Inc. ( CYRX ) shares are under pressure this week after the company posted its preliminary Q2 results on Wednesday, outlining several changes that left market pundits unsettled.

Whilst it doesn't expect to post its finalized Q2 numbers until August 9, the temperature-controlled logistics provider noted it projects sales to fall well behind The Street's estimates.

Subsequently, following my buy rating on CYRX in February, several of the investment facts have been changed, which I'll run through here. To put it bluntly, it is difficult to imagine CYRX catching a rapid bid in the near term without:

1. The reduction in forecasts;
2. Unattractive relative valuations; and
3. The change in sentiment following Wednesday's announcement.

Net-net, I am paring back my rating on the company to a hold, waiting for additional catalysts to form a directional bias either way.

Figure 1.

Change to Investment Facts

Following the announcement from CYRX on Wednesday, there are noticeable changes to the mid-term investment outlook. Chiefly, as mentioned earlier, the significant points are the new forecasts and the corresponding shift in sentiment tied to this.

1. Revised Forecasts, Outlook

The standout for me was CYRX's language on its expectations for Q2 and full-year earnings. For the second quarter, management expect $57.5mm in top-line revenues, around $10mm behind consensus estimates . It also reflects an 11% YoY decline from Q1 FY'22. Moreover, for the full-year it revised projections to the downside, now estimating $233–$243mm at the top, versus a range of $270–$290mm previously. Wall Street had the firm to produce $275mm in revenue.

The adjustments in projected income stem from:

• Lower-than-expected global demand for its capital equipment
• Delays in initiating clinical trials— key to CYRX's growth outlook
• Lagging progress from specific clients, it has engaged in cell and gene therapies.

Figure 2.

The point on capital equipment should come as no surprise to the astute investor, considering the cost of capital has increased at the fastest rate of change in more than 40 years. The yield on the UST 10-year note (US10Y), the proxy for the risk-free rate —and the world's beacon for the cost of money— currently rests at 3.8%, a full 100bps above Q2 2018, and a full 316bps above its mark in Q2 2020.

CEO Jerrell Shelton echoed this in his remarks:

...we have witnessed a global deceleration in capital equipment investment. This unanticipated slowdown, combined with delays in the commencement of clinical trials and subdued revenue ramps from select cell and gene therapy customers, has adversely impacted our second-quarter performance.

We anticipate these demanding conditions to persist throughout the third and fourth quarters of 2023."

Figure 3.

Figure 4. Current yield curve

Even still, Shelton expressed a sense of cautious optimism regarding the company's long-term prospects, underscoring the projected growth of the cell and gene therapy industry. He quoted 10-year geometric growth exceeding 22% for the industry, whereas contrary evidence indicates an 18.2% CAGR over the same period.

However, the tension point here, is that, after its revised forecasts, CYRX would be growing at a full 10 percentage points below its own industry growth forecasts, at just 2.5% YoY expansion from FY'22 ($243mm revised forecast versus $237.3mm in revenue last year). In that vein, it could be argued that its competitors will be stealing market share, especially if they were to push sales at above-industry growth rates.

2. Change in Sentiment

Naturally, the sentiment baked into CYRX equity stock has also changed following the delta to its financial outlook. Positive sentiment, or a positive change in sentiment, is one of the 3 major catalysts required to drive equity returns. Investors need to feel good about a company's prospects in order to pay higher multiples over time.

Figure 5. CYRX Consensus Revenue Estimates FY'23–'25

In the last 3 months, there have been 4 downward revisions to analyst estimates, with another 2 revisions down to earnings. I estimate that further downgrades will come after Wednesday's announcements. Consensus now calls for 6.7% growth in sales for FY'23, with 16% projected for FY'24, stretching to 24% YoY revenue expansion projected for FY'25.

Note, that for the coming 2-years, CYRX is set to grow behind the market's growth projections, linking to my points raised earlier on the company's market penetration. How can CYRX claim additional market share when the cell and gene therapy market —i.e., all of CYRX's purveyors, customers, and competitors— is set to outpace internal forecasts? This looks to be a major headwind in the investment debate in my eyes.

3. CYRX Stock Valuation

Adding to the complexity of things, investors are still selling CYRX at 45x forward EBITDA, a 242% premium to the sector. However, I would argue the market isn't valuing CYRX on its pre-tax earnings. More likely, in my view, it is looking at multiples of sales and book value, considering the firm's unique assets that are used to produce sales.

The stock trades at 3.8x trailing sales, and now, on the revised estimates, trades at 3.6x forward revenues. Investors are also selling CYRX at 1.75x book value, which is no major premium to the firm's assets of equity value in my view. The question is, do these numbers represent value, and are they inherently "cheap"? In my best estimation, the answers are, no, and no. Here's why. For one, I needn't mention it again– but the revised forecasts and sentiment do not call for one paying anything above par right now, in my view. You're paying $3.20 for every $1 in forward sales, for numbers that are behind the broad market. Second, there is an immense opportunity cost involved, when multiple selective opportunities exist elsewhere, even in broad healthcare.

Alas, as identified by the Quant system's rating (see below), CYRX attracts a poor rating on the valuation front, aligning with my own viewpoint.

Figure 6.

In Short

In previous CYRX publications, I had laid out the bullish stance on CYRX on multiple grounds. However, as the economist Keynes once said, "when the facts change, I change my mind"— and the investment facts have certainly changed here. Sticking to my own investment tenets, a change in forecasts, sentiment, and lack of valuation power are not conducive to a revised buy rating.

Instead, my posture on CYRX has softened to remain neutral on the company for now. This is certainly a long game, and patience is a virtue. However, capital needs to compound— it can't be tied up in underperforming assets, not when there are multiple avenues to produce investment returns at the present time. Consequently, I am revising CYRX to a hold, waiting for more color at the firm's Q2 results, penciled in for early August.

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