Shareholders of Option Care Health would probably like to forget the past six months even happened. The stock dropped 32.6% and now trades at $20.85. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
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Why Is Option Care Health Not Exciting?
Despite the more favorable entry price, we’re cautious about Option Care Health. Here are two reasons we avoid OPCH, plus one 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 Option Care Health’s revenue to rise by 2.5%, a deceleration versus its 12.9% annualized growth for the past five years. This projection is underwhelming and indicates its products and services will see some demand headwinds.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Option Care Health’s margin dropped by 1.7 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Option Care Health’s free cash flow margin for the trailing 12 months was 3.8%.
Final Judgment
Option Care Health isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 10.9× forward P/E (or $20.85 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. We’d suggest looking at the most dominant software business in the world.
Stocks We Like More Than Option Care Health
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