Over the past six months, Envista’s shares (currently trading at $27.36) have posted a disappointing 7.6% loss, well below the S&P 500’s 10.5% gain. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Envista, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Envista Will Underperform?
Even though the stock has become cheaper, we’re cautious about Envista. Here are three reasons why NVST doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Envista’s sales grew at a tepid 3.4% compounded annual growth rate over the last five years. This was below our standard for the healthcare sector.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Envista, its EPS declined by 7% annually over the last five years while its revenue grew by 3.4%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Previous Growth Initiatives Have Lost Money
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).
Envista’s five-year average ROIC was negative 2.7%, meaning management lost money while trying to expand the business. Its returns were among the worst in the healthcare sector.
Final Judgment
We see the value of companies making people healthier, but in the case of Envista, we’re out. Following the recent decline, the stock trades at 17.3× forward P/E (or $27.36 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at our favorite semiconductor picks and shovels play.
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