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 |
