NEO - NeoGenomics: What Lies Ahead

2023-05-18 14:00:44 ET

Summary

• Today, we take our first look at NeoGenomics, Inc., a company focused on oncology testing.
• NeoGenomics has strung together a series of strong quarterly results that has helped the shares double so far in 2023.
• Still more upside, or time to "ring the register" on this name? An investment analysis follows in the paragraphs below.

That which can be asserted without evidence, can be dismissed without evidence ."? Christopher Hitchens.

Today, we shine the spotlight on a small cap named NeoGenomics, Inc. ( NEO ) for the first time. The company is benefiting from the growth in cancer testing and screening. NeoGenomics also posted first quarter numbers that nicely beat both top and bottom line expectations.

Still, NEO stock elicits a mixed view right now in the analyst community. The stock has also doubled so far in 2023. Time to take profits or continue to ride the rally in the shares? An analysis follows below.

Company Overview:

NeoGenomics, Inc. is located some three hours northwest of me as the crow flies in Fort Myers, FL. The company operates a network of oncology-focused testing laboratories in the United States, Europe, and Asia. Their services are used by hospitals, reference labs, pathologists, oncologists, clinicians, pharmaceutical firms, and researchers.

NeoGenomics specializes in cancer genetics testing and information services, providing a comprehensive oncology-focused testing menu. Clinical Services accounts for nearly 85% of overall revenues, while Pharma Services accounts for the rest. The stock currently trades just over $18.00 a share and sports an approximate market capitalization just north of $2.3 billion.

First Quarter Results:

NeoGenomics posted its first quarter numbers on May 8th. The company reported a non-GAAP net loss of nine cents a share, six cents above the consensus. Revenues rose 17% on a year-over-year basis to $137.2 million, just over $10 million better than expectations. The company also had nice quarterly " beats" in the third and fourth quarter of 2022. Revenue from Clinical Services rose 16% to $115 million, while sales rose 22% in Pharma Services to $22 million.

Some other tidbits from NeoGenomics' strong quarter. The company improved testing turnaround time by 17% compared to the same period a year ago. The average revenue per test conducted rose (8.4%) for the eighth straight quarter. Testing volume also rose 7.3% from 1Q2022. Management guided to nine to 11% revenue growth in FY2023.

Analyst Commentary & Balance Sheet:

The analyst community is mixed on NeoGenomics, Inc. stock at the moment. Since first quarter results posted, seven analyst firms including Goldman Sachs and Piper Sandler have reissued Buy/Outperform ratings on NEO. Price targets proffered range from $21 to $28 a share. BTIG upgraded NEO from a Neutral to a Buy rating with a $25 price target. BTIG's analyst gave the following commentary for the change:

The company reported a strong Q1 beat and raised guidance for the full year BTIG believes the over-arching trajectory of the business is materially improving. NeoGenomics is executing on margins and on the bottom line, and the company is positioned to drive profitable growth in the out years, and believes NeoGenomics "appears to have an excellent new management at the helm ."

Raymond James, however, downgraded the name to Market Perform from Outperform, while Bank of America ($17 price target) and Morgan Stanley ($19 price target) maintained Hold/Neutral ratings on the shares.

Just under six percent of the outstanding float in NEO is currently held short. There has been no insider activity in this stock in over 14 months and counting. NeoGenomics had cash and marketable securities on its balance sheet of $418 million after posting a net loss of $31 million in the first quarter of 2023. The net loss during the quarter was a significant improvement over the net loss of $49 million the company posted in 1Q2022 , it should be noted. In addition, the cash burn in the first quarter was $20 million.

Verdict:

The current analyst firm consensus is that NeoGenomics will post a loss of 39 cents a share in FY2023 as revenues rise some 10% to a bit north of $560 million. They project revenue growth in the high single digits in FY2024 as losses are cut to 24 cents a share.

NeoGenomics, Inc. posted a nice beat with its first quarter results, and shareholders have been rewarded with a nice rally in 2023 as NeoGenomics has put together a series of solid quarterly performances. However, the company is still seeing quarterly cash burn. Results there are slowly improving, but are "lumpy." NeoGenomics had a net loss of $37 million in last year's third quarter and a net loss of $21 million in the fourth quarter of 2022, compared with a net loss of $31 million in this year's first quarter.

In addition, the company is not going to be profitable until FY2025 at the earliest it appears, and the stock trades at around four times forward sales. It is easy to see how the analyst community is mixed on NeoGenomics' near-term prospects in the current market. The shares could very well be vulnerable to some profit taking after doubling this year, the next time the overall market has a " hiccup ." Therefore, the recommendation is to avoid NeoGenomics, Inc. shares at these levels even as management has strung together a string of commendable quarterly results.

Nothing in life is to be feared, it is only to be understood. Now is the time to understand more, so that we may fear less. "? Marie Curie.

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