The Market Is Betting Big on CTLT - What's the Catch?

Shares of Catalent (CTLT) jumped 1.3 % during today's morning session, bringing their 52 week performance to -53.2%. The stock seems to be overvalued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account the company's strong growth indicators and mixed market sentiment.

Catalent, Inc., together with its subsidiaries, develops and manufactures solutions for drugs, protein-based biologics, cell and gene therapies, and consumer health products worldwide. The large-cap Healthcare company is based in Somerset, United States and has 19,000 full time employees.

CTLT Has a Higher P/E Ratio Than the Sector Average

Compared to the Healthcare sector's average of 13.21, Catalent has a trailing twelve month price to earnings (P/E) ratio of 20.8 and an expected P/E ratio of 13.3. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $2.34 or forward earnings per share of $3.66.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Catalent's P/E ratio is higher than its sector average of 13.21, we can deduce that the market is overvaluing the company's earnings.

Catalent Is Fairly Valued in Terms of Expected Growth

Another factor pointing to Catalent's value is its PEG ratio of 1.81. This is the stock's price to earnings ratio divided by its estimated earnings growth rate. If the resulting ratio is near or lower than 1 -- but higher than 0 -- its indicates that the company is faitly valued in terms of expected growth.

CTLT Has an Average P/B Ratio

Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.

Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For Catalent, the P/B value is 1.9 while the average for the Healthcare sector is 4.07.

CTLT's Weak Cash Flow Generation Is Troubling

The table below shows that Catalent is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in Catalent's case, free cash flow is growing at an average rate of -355.2% with a coefficient of variability of 119.6%. We can also see that cash flows from operations are evolving at a 25.8% rate, versus 52.4%:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2022-06-30 439 -660 -221 12.65
2021-06-30 433 -686 -253 -892.16
2020-06-30 440 -466 -26 -186.15
2019-06-30 248 -218 30 n/a

Catalent's Margins Are Strong

If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Catalent's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.

Catalent's Gross Margins

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2022-06-30 4,828 3,188 33.97 0.44
2021-06-30 3,998 2,646 33.82 6.42
2020-06-30 3,094 2,111 31.78 -0.59
2019-06-30 2,518 1,713 31.97 n/a

Catalent's Operating Margins

Date Reported Total Revenue ($ MM) Operating Expenses ($ MM) Operating Margins (%) YoY Growth (%)
2022-06-30 4,828 885 15.64 -3.22
2021-06-30 3,998 706 16.16 23.36
2020-06-30 3,094 578 13.1 12.54
2019-06-30 2,518 512 11.64 n/a

Catalent's cost of revenue is growing at a rate of 23.0% in contrast to 20.1% for operating expenses. Sales revenues, on the other hand, have experienced a 24.3% growth rate. As a result, the average gross margins growth is 2.1 and the average operating margins growth rate is 10.9, with coefficients of variability of 3.6% and 15.1% respectively.

Catalent Benefits From Positive Market Signals

The market sentiment regarding Catalent is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $100 to $44. CTLT is trading -30.1% away from its target price of $69.5. 3.7% of the company's shares are tied to short positions, and 102.7% of the shares are held by institutional investors.

Holder Shares Date Reported Percentage Value
Vanguard Group, Inc. (The) 19,223,242 2022-09-29 11% $933,865,131
T. Rowe Price Investment Management, Inc. 18,420,356 2022-09-29 10% $894,860,928
Blackrock Inc. 16,086,469 2022-09-29 9% $781,480,693
Capital World Investors 11,409,408 2022-09-29 6% $554,269,061
State Street Corporation 7,126,800 2022-09-29 4% $346,219,957
Veritas Asset Management LLP 6,957,775 2022-09-29 4% $338,008,722
Janus Henderson Group PLC 6,813,663 2022-09-29 4% $331,007,761
Artisan Partners Limited Partnership 5,868,803 2022-09-29 3% $285,106,460
Franklin Resources, Inc. 5,665,825 2022-09-29 3% $275,245,788
JP Morgan Chase & Company 4,407,925 2022-09-29 2% $214,137,004
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.