NOVT - Novanta: The Valuation Seems Way Too High

2023-03-20 14:48:18 ET

Summary

• Novanta Inc. announced solid FY22 and Q4 FY22 results.
• The management has provided optimistic revenue guidance for FY23.
• The stock looks overvalued compared to industry standards.
• I assign a hold rating on Novanta Inc.

Novanta Inc. ( NOVT ) designs and sells photonics and precision motion. It operates through three segments precision motion, vision, and photonics. In the photonics segment, they provide photonics-based solutions, like laser scanning, CO2 laser, ultrafast laser, medical and life science imaging, and medical laser procedures. The vision section offers a variety of medical-grade technologies, like medical pumps; visualization solutions; optical data collection; and embedded touchscreen solutions. Finally, the precision motion section provides optical and inductive encoders, integrated stepper motors, and air-bearing spindles.

Novanta Inc. recently announced their FY22 and Q4 FY22 results . I'll analyze its financial performance in this report. Their growth trajectory appears to be solid, but their current valuation is high, in my view. Hence I assign a hold rating on NOVT.

Financial Analysis

NOVT recently announced Q4 FY22 and FY22 results . The revenue for Q4 FY22 was $218.3 million, a rise of 9.7% compared to Q4 FY21. I think the photonics and vision segment outperformed expectations, which is the primary cause of the increase. Revenues from the photonics and vision segments increased by 27% and 17%, respectively, in Q4 FY22 compared to Q4 FY21. I think the growth in the vision segment was fueled by strength in elective surgical procedures. I also think the growth in the photonic segment was fueled by strength in DNA sequencing and strong demand in their advanced industrial applications. The net income for Q4 FY22 was $15.2 million, a rise of 11% compared to Q4 FY21.

The revenue for FY22 was $860.9 million, a rise of 21.8% compared to FY21. I think that the growth was primarily caused by increased sales to the advanced industrial and medical sectors. In FY22 compared to FY21, their sales to the medical market increased by 16%, and in FY22 compared to FY21, their sales to advanced industrial markets, excluding microelectronics applications, increased by 41%. The net income for FY22 was $74 million, a rise of 47.1% compared to FY21. In my opinion, their financial performance was quite impressive. Despite global challenges like Russia Ukraine conflict and supply chain shortages, they managed to post solid annual and quarterly results with increased revenues and net income.

Technical Analysis

NOVT is trading at the level of $148. It is clearly above its 200 ema at $120, indicating that the stock is in an uptrend. There is presently no buying opportunity because the stock is consolidating. There are numerous resistance levels at the moment that the stock needs to surpass. Therefore, in my opinion, it should be avoided for the time being because I believe it may fail to give returns to its stockholders in the near future.

Should One Invest In NOVT?

The revenue estimate for FY23 is around $904.8 million, which is 5% higher than FY22 revenue. They will achieve their revenue goals, in my opinion, as supply chain shortages are gradually lessening and delivery wait times are gradually getting better. In addition, their clients are returning to more traditional purchase patterns and decreasing backlog coverage. They had a record backlog of $612 million at the conclusion of Q4 FY22, and their sales in the regions of North America and Europe increased by 31% and 4%, respectively, when compared to Q4 FY21, which shows that they are on a solid growth trajectory.

Discussing the valuation

To evaluate Novanta Inc. value, I'll employ two valuation measures. The first is the P/E ratio, calculated by dividing the stock price by earnings per share. NOVT has a P/E ((FWD)) ratio of 47.74x compared to the sector ratio of 19.17x. The second valuation metric is the EV / Sales ratio which is used to determine the company's overall valuation in relation to its sale. They have an EV / Sales ((FWD)) ratio of 6.29x compared to the sector ratio of 2.7x. After looking at both ratios, I believe it is overvalued. Despite the company's excellent development trajectory, I would advise against taking any new positions in it because of the valuation, which seems to be way too high. I think the price is too high, and I think the company may experience a correction in the share price.

Risk

While the majority of Novanta Inc. goods are produced in the United States, the United Kingdom, Germany, and China, a portion of its income comes from its European and Asian operations and includes transactions in Euros, British Pounds, Chinese Yuan, and Japanese Yen. They usually see a decline in their revenues and profit margins when the value of the Euro, British Pound, Chinese Yuan, or Japanese Yen declines. They risk losing customers to lower-cost rivals if they raise the selling prices for their products sold in Europe and Asia in order to maintain profit margins and recoup costs. Therefore, a strong U.S. currency may have a negative impact on its profitability and reported revenues.

Bottom Line

Novanta Inc. reported excellent quarterly and yearly results with rising sales and profit. Their sales increased in North America and Europe, and as issues like supply chain shortages are gradually fading away and consumer buying habits are returning to more conventional patterns, I think the Novanta Inc. business may eventually profit from this. The Novanta Inc. growth trajectory appears to be on track, but the only issue is their excessive valuation. They are overvalued, in my opinion, so now is not the time to buy. Therefore, after reviewing all the factors, I rate Novanta Inc. as a hold.

For further details see: