Shareholders of Omnicell would probably like to forget the past six months even happened. The stock dropped 31.2% and now trades at $29.83. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Omnicell, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Omnicell Will Underperform?
Even though the stock has become cheaper, we don't have much confidence in Omnicell. Here are three reasons why we avoid OMCL and a 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 have short-term success, but a top-tier one grows for years. Regrettably, Omnicell’s sales grew at a mediocre 4.2% compounded annual growth rate over the last five years. This was below our standard for the healthcare sector. 
2. 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 $1.14 billion in revenue over the past 12 months, Omnicell 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.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Omnicell, its EPS declined by 7.6% annually over the last five years while its revenue grew by 4.2%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
We cheer for all companies helping people live better, but in the case of Omnicell, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 16.2× forward P/E (or $29.83 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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