Over the past six months, Amneal’s shares (currently trading at $6.85) have posted a disappointing 17.6% loss while the S&P 500 was down 8.1%. This might have investors contemplating their next move.
Is there a buying opportunity in Amneal, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Even with the cheaper entry price, we're sitting this one out for now. Here are two reasons why we avoid AMRX and a stock we'd rather own.
Why Is Amneal Not Exciting?
Founded in 2002 and growing into one of America's largest generic drug producers, Amneal Pharmaceuticals (NASDAQ:AMRX) develops, manufactures, and distributes generic medicines, specialty branded drugs, biosimilars, and injectable products for the U.S. healthcare market.
1. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Amneal’s margin dropped by 7.5 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Amneal’s free cash flow margin for the trailing 12 months was 8.7%.
2. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Amneal historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 2.4%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.
Final Judgment
Amneal isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 9.7× forward price-to-earnings (or $6.85 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at a top digital advertising platform riding the creator economy.
Stocks We Like More Than Amneal
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