The Pennant Group currently trades at $24.63 per share and has shown little upside over the past six months, posting a middling return of 1.1%. The stock also fell short of the S&P 500’s 16.4% gain during that period.
Is there a buying opportunity in The Pennant Group, 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 The Pennant Group Not Exciting?
We don't have much confidence in The Pennant Group. Here are three reasons there are better opportunities than PNTG 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 $798.9 million in revenue over the past 12 months, The Pennant Group 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. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
The Pennant Group has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.2%, subpar for a healthcare business.
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).
The Pennant Group historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.7%, somewhat low compared to the best healthcare companies that consistently pump out 20%+.
Final Judgment
The Pennant Group isn’t a terrible business, but it doesn’t pass our bar. With its shares underperforming the market lately, the stock trades at 20.9× forward P/E (or $24.63 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at the most entrenched endpoint security platform on the market.
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