Omnicell’s 23% return over the past six months has outpaced the S&P 500 by 13%, and its stock price has climbed to $43.73 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Omnicell, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Omnicell Will Underperform?
We’re glad investors have benefited from the price increase, but we're swiping left on Omnicell for now. Here are three reasons there are better opportunities than OMCL and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Omnicell’s 6% annualized revenue growth over the last five years was mediocre. This was below our standard for the healthcare sector.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Omnicell, its EPS declined by 6.8% annually over the last five years while its revenue grew by 6%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Omnicell historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 0.5%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.
Final Judgment
We cheer for all companies helping people live better, but in the case of Omnicell, we’ll be cheering from the sidelines. With its shares beating the market recently, the stock trades at 23.2× forward P/E (or $43.73 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at one of our top digital advertising picks.
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