Catalent Stock: Charting A Post-Covid Future (NYSE:CTLT)

Not all bees are loyal to the same hive. ― Marty Rubin

Today, we take a look at Catalent, Inc. (NYSE:CTLT) for the first time. This diversified supplier of Biologics, healthcare and pharma products has maintained analyst firm enthusiasm despite a forward guidance cut at its last quarterly earnings report. The company is delivering steady organic sales growth in an uncertain market environment. With the stock down just over 40% over the past year, is this equity in the ‘buy zone‘ yet? An analysis follows below.

Company Overview:

Catalent, Inc. is based just outside of New York City in Somerset, NJ. This diverse company develops and manufactures solutions for drugs, protein-based biologics, cell and gene therapies, and consumer health products. Currently the stock trades just north of $75.00 a share and sports an approximate market capitalization of $13 billion. The company’s fiscal year ends on June 30th.

The company recently announced that it restructuring itself from four business divisions to two. They will be Biologics and Pharma/Consumer Health. The Biologic segment will encompass development and manufacturing for biologic proteins; cell, gene, and other nucleic acid therapies; plasmid DNA; iPSCs, and vaccines. The latter segment focus on the development and manufacturing of complex oral solids, softgel formulations, Zydis® fast-dissolve technologies, and gummy, soft chew, and lozenge dosage forms; formulation, development, and manufacturing platforms for oral, nasal, inhaled, and topical dose forms; and clinical trial development and supply services.

Fourth Quarter Results:

On August 29th, the company posted its fourth quarter numbers. The company had a non-GAAP profit of $1.19 a share, four pennies above the consensus. Revenues rose at a 10% clip from the same period a year ago to $1.31 billion, which was $20 million light of expectations. Most of the quarter’s sales growth came from the Biologics segment, which grew double digits despite lower year-on-year revenue in the quarter from its COVID-19 program. The company is in the process of concluding or deemphasizing its COVID-19 program that was classified as a commercial product for revenue recognition purposes. Management is assuming Covid volume falls by two-thirds in its FY2023 guidance (below).

Adjusted EBITDA was $384 million for the quarter. Like many companies during the quarter, the company is taking a hit for a strong dollar. EBITDA grew 16% on a constant currency basis and revenues would have been up some 15% in constant currency.

Despite a decent quarter, the stock sold off post earnings as management took down their forward sales guidance to a range of $4.975 billion to $5.225 billion in FY2023. The analyst consensus was nearly $5.3 billion prior to this guidance cut.

The company is in a bit of transition as their new organizational structure goes into effect and as its Covid program is in the process of concluding. Non-Covid-19 sales are expected to grow organically by more than 25% at constant currency in this new fiscal year.

The company will also grow from its recent agreement to acquire Metrics Contract Services from Mayne Pharma for $475 million. This gives Catalent a full services specialty CDMO with a 330,000 square foot facility in Greenville, North Carolina. This acquisition should close prior to the end of 2022.

Analyst Commentary & Balance Sheet:

Since second quarter results posted, nine analyst firms including Barclays, JP Morgan and UBS have reiterated Buy or Outperform ratings on the stock. Price targets proffered range from $105 to $130 a share. Albeit most of these contained downward price target revisions. Deutsche Bank seems the lone dissenter on the stock with a Hold rating and $105 price target (down from $110 previously).

Approximately two percent of the outstanding shares are currently held short in CTLT. Numerous insiders have been frequent sellers of the equity throughout 2022. They disposed of approximately $7 million worth of share in aggregate in the third quarter. The last insider purchase I can find in the shares was in February of 2020 when the pandemic was just hitting our shores. The company ended the second quarter with approximately $540 million of cash and securities on its balance sheet against just over $3.9 billion in long term debt. The company had a net leverage rate of 2.9x at the end of the fiscal 2022 year.

Verdict:

The current analyst firm consensus has the company earning $3.80 a share in FY2023 (roughly flat to FY2022’s profits) and revenues rising five percent to just under $5.1 billion. Next fiscal year, they see profits of approximately $4.40 a share as revenues grow 10%.

Catalent is in a defensive sector of the market and is not as vulnerable to economic impacts should a global recession scenario play out in 2023, which seems more and more likely. The stock also maintains strong analyst support.

That said it is hard to get excited about a stock trading at 20 times earnings that is likely to have no earnings growth this fiscal year on mid-single-digit rise in revenues. The stock does not pay a dividend. Therefore, we are passing on any investment recommendation on the stock at this time.

Betrayals rarely come from an enemy. ― Aniekee Tochukwu Ezekiel