2023-07-31 08:16:01 ET
Summary
- Today, we take a look at Catalent, a drug manufacturer that has been beset by myriad issues over the past year resulting in a 55% drop in the stock.
- The company has recently drawn the interest of activist investor Elliott Management, meaning significant changes could be ahead.
- Will this halt the decline in the shares? An investment analysis on Catalent follows in the paragraphs below.
I'm living so far beyond my income that we may almost be said to be living apart. ? Saki
Today, we put Catalent, Inc. ( CTLT ) in the spotlight. This mid-cap drug manufacturer provides various products and services to the biopharma, biotech, healthcare and biologic industries. The stock has also fallen over 55% over the past 12 months. Is this a buying opportunity or a falling knife? An analysis follows below.
The shares moved up on July 20th on reports activist Elliott Management has taken a significant stake in the firm and will be pushing to change some company directors. Catalent has been beset over the past year by falling revenues, a high debt load, issues at its manufacturing facilities and a delay in its first quarter earnings report. A month before news of Elliott's interest in the firm, Catalent had named a new CFO. Will activist pressure change the recent fortunes of the company. An analysis follows below.
Company Overview
This drug manufacturer is headquartered just outside New York City in Somerset, NJ. The company develops and manufactures solutions for drugs, protein-based biologics, cell and gene therapies, and consumer health products. It has two main divisions or business focus areas. Its Pharma and Consumer Health segment provides formulation, development, and manufacturing services for soft capsules for use in a range of customer products including prescription drugs. Catalent's Biologics segment provides biologic cell-line, develops and manufactures cell therapy, and viral based gene therapy. It also offers vials, prefilled syringes and cartridges as well as analytical development and testing services. The stock currently trades just below fifty bucks a share and sports an approximate market capitalization of $8.7 billion. Catalent, Inc. operates on a fiscal year that begins on July 1st.
First Quarter Results
Catalent's first quarter earnings report was delayed to June 12th, due to ' accounting adjustments '. The company had a non-GAAP loss of nine cents a share, which was a nickel a share above the consensus. Revenues fell 19% on a year-over-year basis to $1.04 billion which beat expectations by nearly $70 million.
Overall sales are falling primarily to a huge drop off of Covid related revenues. They came in at $120 million for the third quarter, a drop off of 68% from Q3 2022. This was a part of significant issues within the company's Biologics segment. Sales overall fell to $475 million in the quarter from $700 million in the same period a year ago.
Catalent's Pharma and Consumer Health division has some of its own issues (see below), but the falloff of revenues has been much less severe falling to $563 million from $574 million in the same period a year ago.
The company had a GAAP net loss of $1.26 a share or a negative $227 million. However, this included a goodwill impairment charge of $210 million, which includes the effect of a $42 million deferred tax adjustment.
Analyst Commentary & Balance Sheet
The analyst community is currently very cautious about Catalent's prospects. Since first quarter numbers posted, four analyst firms including UBS and RBC Capital have reiterated Buy/Outperform ratings. Price targets proffered range from $49 to $55 a share. A half dozen analyst firms including JP Morgan and Bank of America have reissued Hold/Sell ratings with price targets of between $39 to $47 a share.
This includes a downgrade by Jefferies to Hold who has a $44 price target on the stock. The analyst there believes the 'company's growth will be negatively impacted by the negative impacts of biotech funding weakness, soft consumer demand, and timing of capacity additions' He also sees Catalent's Covid revenues, which management has guided to $600 million in FY2023, falling to $100 million in FY2024.
Approximately six percent of the outstanding float in the shares are currently held short. Three insiders have sold just under $140,000 collectively in the stock of CTLT so far in 2023. The company ended the first quarter with approximately $250 million of cash and marketable securities after reporting an adjusted net loss of $17 million for the quarter. The company has sizable long-term debt of $4.85 billion. Catalent's First Lien Debt over LTM Adjusted EBITDA was 2.2x at the end of the quarter. This is far above the 6.5x required by its senior secured credit agreement.
Verdict
The company had a profit of $3.89 a share in FY2022 on $4.83 billion. The analyst firm consensus has profits falling hard to $1.02 a share revenues decline to $4.26 billion. They see sales falling slightly to $4.19 billion in FY2024 with the company seeing earnings of $1.20 a share.
It is hard to get too excited about Catalent even after the 55% drop in the stock over the past 12 months. Elliott Management could help the company make changes that could turn out to be shareholder friendly, but it is way too early to bet on that outcome.
In addition, the company carries a high amount of debt and is trading at north of 45 times forward earnings and revenue growth is not likely on the horizon until FY2025. Therefore, this might be a potential turnaround story in the future. However, I have no investment recommendation until the company shows improvement on myriad fronts. This also seems to be the current consensus among the analyst community as well.
The ideas of debtor and creditor as to what constitutes a good time never coincide. ? P.G. Wodehouse
For further details see:
Catalent: Myriad Issues To Fix