3 Reasons to Avoid AMRX and 1 Stock to Buy Instead

Amneal’s 34% return over the past six months has outpaced the S&P 500 by 30.9%, and its stock price has climbed to $13.16 per share. This performance 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?

We’re glad investors have benefited from the price increase, but we're cautious about Amneal. Here are three reasons why AMRX doesn't excite us and a stock we'd rather own.

1. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Amneal’s revenue to rise by 2.1%, a deceleration versus its 8.7% annualized growth for the past five years. This projection doesn't excite us and implies its products and services will face some demand challenges.

2. Shrinking Adjusted Operating Margin

Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.

Analyzing the trend in its profitability, Amneal’s adjusted operating margin decreased by 1 percentage points over the last five 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 20.7%.

3. 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 4.9%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.

Final Judgment

Amneal’s business quality ultimately falls short of our standards. With its shares beating the market recently, the stock trades at 13.8× forward P/E (or $13.16 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our top software and edge computing picks.

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