Over the past six months, Amneal’s shares (currently trading at $7.97) have posted a disappointing 8.7% loss, well below the S&P 500’s 5.4% gain. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Amneal, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Amneal Not Exciting?
Despite the more favorable entry price, we don't have much confidence in Amneal. Here are two reasons why you should be careful with AMRX and a stock we'd rather own.
1. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Amneal’s margin dropped by 12.1 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. Amneal’s free cash flow margin for the trailing 12 months was 8.9%.
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? A company’s ROIC explains this by showing how much operating profit it makes compared 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 2.9%, 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 quality test. Following the recent decline, the stock trades at 11.6× forward P/E (or $7.97 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. Let us point you toward a top digital advertising platform riding the creator economy.
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