FLGT - Fulgent Genetics: Post-Pandemic Devaluing Appears Overdone

2023-07-29 14:00:00 ET

Summary

• Fulgent Genetics is a technology-driven company focused on clinical diagnostics and therapeutics, with recent expansion into precision medicine.
• FLGT's stock presents mixed signals with potential undervaluation, despite negative earnings forecasted till 2025.
• For Q2 earnings, monitor the core revenue performance, updates on reproductive health and oncology initiatives, and changes in cash reserves and debt.
• Considering robust core business, growth prospects and current valuation, a 'Buy' recommendation is suggested for Fulgent Genetics.

Company Overview

Established in 2011, Fulgent Genetics ( FLGT ) is a technology-driven organization dedicated to clinical diagnostic and therapeutic advancements. The diagnostic branch of the company provides a wide range of molecular and genetic testing services to improve patient care. On the other hand, their therapeutic division is primarily devoted to creating cancer treatments by employing an innovative nanoencapsulation platform to enhance drug profiles.

The following article analyzes the financial performance, stock valuation, strategic positioning, and future prospects of Fulgent Genetics, recommending investment despite industry risks.

Financial Performance

Starting with financials: In the first quarter of 2023, Fulgent Genetics posted a total revenue of $66.2 million. Core revenue, which excludes COVID-19 testing services, rose by an impressive 150% year-on-year to reach $62.7 million. However, the company reported a GAAP loss of $15.3 million, equating to $0.52 per share. As of the end of March 2023, Fulgent held $867.8 million in cash, cash equivalents, and marketable securities. The company projects a core revenue of approximately $62 million for the second quarter and predicts a full-year core revenue of about $250 million for 2023, with an expected GAAP loss of roughly $2.50 per share.

Stock Assessment & Valuation

According to Seeking Alpha data, the performance of Fulgent Genetics' stock sends mixed messages that potential investors should consider closely. Although the company is forecasted to register negative earnings per share [EPS] until 2025, the annual rate of loss is on a downward trajectory, suggesting possible financial improvement. Sales are predicted to bounce back in 2024, with year-on-year growth of 16.65%, indicating potential recovery.

Analysts' earnings revisions for FY1 are evenly divided between upward and downward, indicating uncertainty about Fulgent's near-term performance. From a valuation perspective, the price-to-book ratio is below 1, and the EV-to-sales ratio is just shy of 1, which could imply that the stock is undervalued.

While Fulgent has achieved impressive three-year revenue growth (CAGR of 118.64%), its current YoY revenue growth is negative, highlighting the fluctuating nature of its business performance. Nevertheless, a robust gross profit margin of 39.24% stands out, although negative EBIT and net income margins point to ongoing operational inefficiencies.

Regarding momentum, Fulgent's stock has outperformed the S&P 500 in the last three months, though it underperformed in the previous year. This could signal recent positive sentiment towards the stock despite disappointing long-term performance.

The company's capital structure is healthy, boasting a market cap of $1.19 billion, modest total debt of $35.33 million, and substantial cash reserves of $504.49 million, providing a solid foundation for future investments or potential downturns.

Fulgent Genetics' Strategic Positioning and Future Prospects

Fulgent Genetics is strategically positioning itself in growth markets, notably in the reproductive health and oncology sectors. The company's expansion into Beacon testing and other reproductive health services coincides with Frost & Sullivan projections that the global prenatal testing market will blossom to $11 billion by 2026, signaling abundant growth opportunities.

Fulgent's acquisition of Inform Diagnostics is a strategic entry into anatomic pathology, complementing their existing services and widening their customer base. Although this move initially put pressure on margins, the potential for top-line growth and margin enhancements through refined processes and cross-selling opportunities in the precision diagnosis market is promising.

In the oncology sector, Fulgent's pharmaceutical division is a pioneer in nano-encapsulation technology for cancer treatments. The lead drug candidate, FID-007, a PEOX-based polymer encapsulated paclitaxel, shows promise in treating various types of cancers, potentially positioning Fulgent as a relevant player in the cancer treatment market. FID-007 is currently "recruiting" in a Phase 1 trial for patients with advanced solid tumors.

My Analysis & Recommendation

Despite the recent decline in Fulgent's stock price, largely due to diminishing COVID-19 testing revenues, the company's core business continues to thrive. With the pandemic in retreat, Fulgent's continued expansion into reproductive health, oncology, and anatomic pathology industries highlights its strategic positioning for future success.

Fulgent's financial performance, although somewhat volatile, exhibits a strong cash reserve and a manageable debt level. This robust capital structure is expected to support ongoing investments in growth and innovation.

The current valuation measures suggest that Fulgent may be undervalued, potentially providing a golden opportunity for investors. With anticipated sales growth and a reducing rate of losses over the next few years, there are reasons for optimism regarding the company's financial future.

Taking these factors into account, Fulgent Genetics is an attractive investment opportunity. The robust core business, promising growth prospects, and current valuation together present a persuasive argument. As a result, I recommend a 'Buy' for Fulgent Genetics. Their enduring core business, combined with ambitious growth strategies, suggests a promising future for the company and its investors.

For the upcoming Q2 earnings report on August 4, investors should keep an eye on Fulgent's core revenue performance, specifically whether it meets or exceeds the projected $62 million. This would give a hint about the company's ability to grow its revenue base apart from COVID-19 testing services. Moreover, any updates on the progress of their oncology and reproductive health initiatives could serve as important indicators of future growth potential. Lastly, changes in the company's cash reserve and debt situation can provide insight into its financial stability and readiness for further expansion.

Risks to Thesis

When the facts change, I change my mind.

While I firmly believe in the promising future and potential returns of Fulgent Genetics, it's important to acknowledge that there are inherent risks in any investment decision.

Firstly, Fulgent operates in a highly competitive and rapidly evolving industry. There's a risk that they could be outpaced by competitors, especially larger ones with more resources. If they fail to continue innovating and staying ahead of the curve, their market position and future growth could be impacted.

Secondly, the company's financial performance is marked by some degree of volatility. Despite recent improvements, they've experienced negative earnings and losses in recent years. If the company cannot reverse these trends, it could negatively affect its stock performance and future prospects.

Another key risk is regulatory uncertainty. As a company operating in the healthcare sector, Fulgent must navigate a complex web of regulations. Any changes in these rules or failure to comply with them could result in penalties, operational disruptions, and damage to their reputation.

Lastly, while Fulgent's acquisition of Inform Diagnostics and expansion into precision medicine could offer new growth opportunities, there's also a risk associated with integrating new businesses. If the company fails to effectively integrate the new operations or achieve expected synergies, it could strain their financials and erode investor confidence.

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