Plenty More Upside In NeoGenomics Shares

| About: NeoGenomics Inc. (NEO)

NeoGenomics (NGNM.OB) shares reached a new high on February 17 at $1.80, last seen Aug. 3, 2009. The company's shares have appreciated 78.2% from their 52-week low of $1.01 per share.

I think the momentum will continue in the coming quarters, and share price could double or even triple in 2012. My optimism is based on the fact that the company has achieved strong financial performance in fiscal year 2011, and that continued success is widely expected for 2012 and beyond.

NeoGenomics just reported another quarter of strong financial results.

On February 16, 2012, NeoGenomics reported strong financial results for the fourth quarter ended December 31, 2011.

Total revenue for Q411 was $12.9 million, a 47% increase compared to the revenue of $8.8 million for Q410. Although average revenue per test in Q411 declined by 6%, test volume for Q411 increased by 57%. Average cost of goods sold per test for the quarter also improved by 7% from last year, offsetting the reduction in average revenue per test. As a result, gross margin improved to 45.2% in 2011 from 44.6% in 2010. Requisitions increased by 48%, and the average number of tests per case increased by 6%.

SG&A expenses for Q411increased by $1.0 million (22%) from last year's fourth quarter, due primarily to an increase in payroll and bad debt expense. SG&A as a percentage of revenue fell to 42.3% from 51.0% last year.

Net income for Q411 was $152,000 or $0.00/share versus a net loss of ($377,000) or ($0.01)/share for Q410. Adjusted EBITDA for Q411 increased to $1.1 million from -$97 for Q410.

The balance sheet is strong. As of December 31, 2011, the company had cash and cash equivalents of $3.1 million with little debt. The company also has approximately $3.8 million line of credit backed by accounts receivables.

Summary of Quarterly Performance

($, 000s)

Q110

Q210

Q310

Q410

Q111

Q211

Q311

Q411

Total Revenue

8,418

8,490

8,708

8,755

8,805

10,466

11,320

12,893

% Growth

21.8%

13.8%

19.3%

12.3%

4.6%

23.3%

30.0%

47.3%

Gross Margin

48.4%

46.1%

44.7%

44.6%

43.9%

44.5%

44.8%

45.2%

SG&A as a % of Revenue

55.4%

55.5%

56.3%

51.0%

52.0%

45.6%

44.5%

42.3%

Net Income (Loss)

($750.0)

($978.0)

($1,198.0)

($377.0)

($893.0)

($293.0)

($143.0)

$152.0

Diluted EPS

($0.02)

($0.03)

($0.03)

($0.01)

($0.02)

($0.01)

($0.00)

$0.00

Adjusted EBITDA

($149.0)

($398.0)

($97.0)

$29.0

$483.0

$693.0

$1,055.0

Test Volume

14,042

14,464

14,477

14,349

15,396

18,358

19,978

22,557

% Growth

34.3%

27.8%

29.4%

12.9%

9.6%

26.9%

38.0%

57.2%

Average Price/Test

600.00

587.00

602.00

610.00

572.00

570.00

567.00

571.59

% Growth

-9.2%

-10.9%

-7.7%

-0.5%

-4.7%

-2.9%

-5.8%

-6.3%

Click to enlarge

For the full year 2011, revenue was $43.5 million, a 27% increase over 2010 revenue of $34.4 million. Test volume increased by 33%, and average revenue per test decreased by 5% for 2011. Gross margin fell to 44.7% in 2011 from 45.9% in 2010 due primarily to the full year decrease in average revenue per test. SG&A expenses increased by 6% in 2011. As a percentage of revenue, SG&A expenses fell to 45.6% in 2011 from 54.5% in 2010. Net loss in 2011 was ($1.2) million or ($0.03)/share versus a net loss of ($3.3) million or ($0.09)/share in 2010. Adjusted EBITDA for 2011 increased by $2.7 million to $2.1 million from ($566,000) in 2010.

Summary of Annual Performance

$, 000s

2007

2008

2009

2010

2011

2012E

2013E

2014E

2015E

Total Revenue

11,505

20,015

29,469

34,371

43,484

57,500

73,600

92,736

118,702

% Growth

78.0%

74.0%

47.2%

16.6%

26.5%

32.2%

28.0%

26.0%

28.0%

Gross Margin

52.0%

53.3%

51.6%

45.9%

44.7%

45.5%

46.5%

47.5%

49.5%

SG&A as a % of Revenue

79.3%

57.7%

57.5%

54.5%

45.6%

38.6%

36.0%

35.0%

34.1%

Net Income (Loss)

(3,380.0)

(1,383.0)

(2,243.0)

(3,303.0)

(1,177.0)

2,006.8

5,524.0

9,349.6

15,757.5

Diluted EPS

(0.11)

(0.04)

(0.06)

(0.09)

(0.03)

0.04

0.11

0.17

0.26

Adjusted EBITDA

(1,017.0)

809.0

103.0

(566.0)

2,134.0

3,506.8

7,024.0

10,849.6

17,257.5

% Growth in tests performed

63.7%

55.7%

39.7%

25.5%

33.1%

35.0%

37.0%

40.0%

45.0%

Click to enlarge

Key takeaways from the financial performance.

NeoGenomics reported another quarter of strong financial performance. For a third quarter in a row, the company posted the largest year over year and sequential increases in quarterly revenue in the company's history and revenue growth rate continued to accelerate throughout the fourth quarter.

I am pleased to see the average price per test stabilized and began to increase in Q411. Although average price in Q411 declined 6.3% year over year, sequential average price actually increased 0.8%. We believe average price per test will remain stable at about $570 level in the coming quarters.

Although average revenue per test declined in 2011, this was offset by increased test volume and with increases in productivity.

I am encouraged by the continued increases in the number of new clients, as well as additional work from existing clients. The company's sales and marketing team is more productive, and cost control is successful. As a result, SG&A expense as percentage of total revenue continued to decrease. We believe operating leverage will continue to increase and will contribute to the bottom line.

Although gross margin for the first two quarters of 2011 declined, it began to stabilize in third quarter and increase in the fourth quarter of 2011. Sequentially, gross margin has been improving since the beginning of 2011. The company remains focused on initiatives to improve gross margin, and I expect continued incremental gross margin increase in the coming quarters.

NeoGenomics achieved profitability in Q411, and I believe new initiatives taken by NeoGenomics will continue to increase the top line dramatically in the coming quarters. Management commitment and capability has been evidenced by recent strong financial performance. I believe NeoGenomics is well positioned for continued success in the coming quarters and years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I work as a Consultant Analyst for Zacks Investment Research. The article is written by me and is 100% my opinion. I receive compensation from Zacks for writing equity research reports and providing valuation analysis on this company’s stock and expect to do so in the future. Zacks receives compensation from the company. Please see the Zacks Disclaimer for further information: http://scr.zacks.com/Disclaimer/default.aspx