Jazz Pharmaceuticals has had an impressive run over the past six months as its shares have beaten the S&P 500 by 28.7%. The stock now trades at $232.44, marking a 37.1% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in Jazz Pharmaceuticals, 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 Is Jazz Pharmaceuticals Not Exciting?

We’re happy investors have made money, but we’re swiping left on Jazz Pharmaceuticals for now. Here are three reasons we avoid JAZZ, plus one stock we’d rather own.

1. Lackluster Revenue Growth

Long-term growth is the most important, but within healthcare, a stretched historical view may miss new innovations or demand cycles. Jazz Pharmaceuticals’s recent performance shows its demand has slowed as its annualized revenue growth of 7.5% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs.

2. Shrinking Adjusted Operating Margin

Adjusted operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D. It also removes various one-time costs to paint a better picture of normalized profits.

Looking at the trend in its profitability, Jazz Pharmaceuticals’s adjusted operating margin decreased by 21.5 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 22.4%.

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 Jazz Pharmaceuticals, its EPS declined by 4.2% annually over the last five years while its revenue grew by 11.7%. This tells us the company became less profitable on a per-share basis as it expanded.

Final Judgment

Jazz Pharmaceuticals isn’t a terrible business, but it doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at $232.44 per share (or a forward price-to-sales ratio of 3.4×). The market typically values companies like Jazz Pharmaceuticals based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere. We’d recommend looking at our favorite semiconductor picks and shovels play.

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