A prominent player in the pharmaceutical and biotech industry with a market cap of $7.14 billion, Catalent, Inc. (CTLT) specializes in the development and manufacturing of solutions for a wide range of products, including drugs, protein-based biologics, cell and gene therapies, and consumer health items on a global scale.

CTLT operates in several segments within the pharmaceutical and healthcare industry, including Softgel and Oral Technologies; Biologics; Oral and Specialty Delivery; and Clinical Supply Services. In addition, it extends its services to other healthcare market segments, such as animal health, medical devices, and cosmetics industries.

After CTLT announced a postponement in its quarterly filing with the U.S. Securities and Exchange Commission (SEC) owing to a goodwill impairment charge of approximately $700 million, the company declared its fiscal first-quarter results on November 15, 2023.

The drug manufacturing delayed its annual results several times this year on account of production snags. In August, the company postponed its annual filing, citing the need for an “assessment of internal controls” pertaining to its financial reporting for the year.

Nevertheless, despite exceeding analyst estimates, the company’s earnings report for the first quarter revealed a drop in its revenue and major losses. Notably, the Biologics segment saw a 16% decline in net revenue compared to the previous year’s quarter.

Furthermore, as of September 30, 2023, CTLT’s total debt increased to $4.95 billion. The net leverage ratio for the same period rose to 7.4x, reflecting an increase from 6.4x on June 30, 2023, and a significant jump from 3.2x as of September 30, 2022.

On top of it, the dynamics of institutional investment in CTLT have seen recent shifts. Of the 510 institutional holders, 235 have opted to reduce their positions in the stock, and 78 holders have entirely liquidated their positions. This indicates a changing sentiment among institutional investors regarding their stake in CTLT.

CTLT’s shares have plunged 41.5% over the past nine months and 6.1% over the past month to close the last trading session at $39.60.

Here are the factors that could affect CTLT’s performance in the near term:

Weak Financials

For the fiscal first quarter that ended on September 30, 2023, CTLT’s net revenues plunged 3.9% from the year-ago value to $982 million, while the company’s operating loss amounted to $735 million versus operating earnings of $60 million in the prior-year quarter.

Furthermore, during the same period, the company’s net loss came in at $715 million and $3.94 per share. Its adjusted EBITDA decreased 38.5% from the year-ago value to $115 million. Also, its cash and cash equivalents stood at $209 million, declining 25.5% compared to $280 million as of June 30, 2023.

Poor Profitability

The stock’s trailing-12-month negative levered FCF margin of 4.18% compares to the 0.11% industry average. Likewise, its trailing-12-month negative EBIT margin of 0.52% compares to the industry average of 0.61%. Furthermore, CTLT’s trailing-12-month gross profit margin of 23.21% is 59% lower than the 56.62% industry average.

Unfavorable Analyst Estimates

Street expects revenue for the fiscal second quarter (ending December 2023) to decline 11.3% year-over-year to $1.02 billion, while its EPS for the same period is projected to come in at a negative $0.02. In addition, its EPS for the fiscal period ending June 2024 is expected to register a decline of 25.3% year-over-year.

High Valuation

In terms of forward non-GAAP P/E, CTLT is trading at 52.84x, 189.6% higher than the industry average of 18.25x. Likewise, its forward EV/EBITDA multiple of 16.34 is 26.9% higher than the industry average of 12.88. Furthermore, its forward Price/Cash Flow multiple of 21.57 is 34.8% higher than the industry average of 16x.

POWR Ratings Exhibit Bleak Prospects

CTLT’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, translating to a Sell in our proprietary rating system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. CTLT has a D grade for Momentum in sync with the stock currently trading below its 50-day moving average of $41.72 and 200-day moving average of $48.63.

Moreover, the stock has a D grade for Sentiment and Quality, justified by its bleak analyst estimates and poor profitability.

Within the Medical – Pharmaceuticals industry, CTLT is ranked #133 out of the 150 stocks.  

Beyond what we’ve stated above, we have also rated the stock for Growth, Value, and Stability. Get all ratings of CTLT here.

Bottom Line

Despite the consistent demand for pharmaceuticals driven by the ongoing necessity for medications and treatments, CTLT faces challenges such as weak financial performance, poor profitability, an elevated valuation, and negative sentiments among analysts.

These factors collectively cast a cautious shadow on the outlook for the stock’s future performance. Thus, potentially avoiding investment in CTLT may be prudent for investors.  

How Does Catalent, Inc. (CTLT) Stack Up Against Its Peers?   

While CTLT has an overall grade of D, equating to a Sell rating, you may also check out these other stocks within the Medical – Pharmaceuticals industry: Santen Pharmaceutical Co., Ltd. (SNPHY), Taro Pharmaceutical Industries Ltd. (TARO), and AbbVie Inc. (ABBV), with an A (Strong Buy) rating. For exploring more Medical – Pharmaceuticals stocks, click here.     

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CTLT shares were trading at $40.00 per share on Friday morning, up $0.40 (+1.01%). Year-to-date, CTLT has declined -11.13%, versus a 20.31% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Mukherjee

Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run. More...

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