StockStory advises selling Neogen shares, citing the company's high leverage and elevated valuation despite a recent rally. The analysis questions whether Neogen's current price reflects sustainable fundamentals or poses a risk to long-term investors.
Neogen stock has returned 25.9% over the past six months, outperforming the S&P 500 by 16.8%. This performance has pushed the share price to $11.78. While the firm acknowledges this recent strength, it states it lacks confidence in Neogen's long-term outlook. The report highlights three primary reasons for avoiding the stock, centered on growth stagnation, declining returns on capital, and excessive debt.
The firm notes that Neogen’s recent performance marks a sharp pivot from its five-year trend. Over the last two years, the company’s revenue has shown annualized declines of 1.6%. StockStory places heavy emphasis on long-term growth, arguing that a stretched historical view might miss recent innovations, yet Neogen's trajectory suggests limited profitable growth opportunities.
This concern is compounded by a significant decrease in Neogen's return on invested capital (ROIC) over recent years. ROIC measures operating profit relative to the capital raised through debt and equity. The combination of falling ROIC and already low returns indicates that Neogen is generating less profit from its invested capital than in the past.
The most critical factor in the report is Neogen's balance sheet. The company holds $774.2 million in debt, which exceeds its $172 million in cash. This results in a net-debt-to-EBITDA ratio of 6 times, based on EBITDA of $108.9 million over the last 12 months. StockStory classifies this as overleveraged.
At this debt level, incremental borrowing becomes more expensive. The report warns that credit agencies could downgrade the company's rating if profitability falls further. Additionally, if the market turns unexpectedly, Neogen could be backed into a corner, a scenario the analysts seek to avoid when selecting high-quality companies. Consequently, StockStory remains cautious until Neogen improves its profitability or pays down its debt.
Beyond balance sheet risks, the firm argues that Neogen fails its quality test due to valuation. The stock currently trades at 34.7× forward P/E. At this level, a significant amount of good news is already priced in. StockStory suggests that other companies currently feature superior fundamentals at lower valuations, specifically pointing toward its top software and edge computing picks as alternatives.