2 Reasons to Avoid AMPH and 1 Stock to Buy Instead

Amphastar Pharmaceuticals has had an impressive run over the past six months as its shares have beaten the S&P 500 by 19.5%. The stock now trades at $27.76, marking a 31% gain. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in Amphastar Pharmaceuticals, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Amphastar Pharmaceuticals Not Exciting?

We’re happy investors have made money, but we're swiping left on Amphastar Pharmaceuticals for now. Here are two reasons there are better opportunities than AMPH and a stock we'd rather own.

1. Fewer Distribution Channels Limit its Ceiling

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With just $723.3 million in revenue over the past 12 months, Amphastar Pharmaceuticals is a small company in an industry where scale matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.

2. Shrinking Adjusted Operating Margin

Adjusted operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies because it excludes non-recurring expenses, interest on debt, and taxes.

Looking at the trend in its profitability, Amphastar Pharmaceuticals’s adjusted operating margin decreased by 4.3 percentage points over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 31.1%.

Final Judgment

Amphastar Pharmaceuticals isn’t a terrible business, but it isn’t one of our picks. With its shares topping the market in recent months, the stock trades at 8.2× forward P/E (or $27.76 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. Let us point you toward our favorite semiconductor picks and shovels play.

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