NeoGenomics: The Cancer Diagnostics Company No One Seems To Be Talking About

| About: NeoGenomics Inc. (NEO)

Summary

NeoGenomics is growing rapidly, but still flying under the radar for individual investors making it undervalued.

The Clarient acquisition will more than double the company's revenues.

Institutional and insider ownership is promising.

Introduction

When most investors are looking for growth companies they usually are looking for something flashy, that has a lot of hype about it or with a big name tied to it. For example, OPKO Health (NYSEMKT:OPK) has Dr. Frost, Cancer Genetics Inc. (NASDAQ:CGIX) has John Pappajohn and TrovaGene (NASDAQ:TROV) has the only cancer monitoring system that can be assessed through urine. However, it is best to invest in a growth company or firm no one is talking about yet, which is why I was thrilled when I stumbled upon NeoGenomics (NASDAQ:NEO).

NeoGenomics issued its earnings report this morning and it blew away expectations. Usually, when a company's quarterly CC is eminent, there is a lot of buzz and speculation about earnings and revenue growth from the financial world. However, the investment world is oddly quiet on the matter. NEO message boards are silent and it seems investment blogs lack any curiosity in the company. After taking a quick look at NEO's balance sheet, I was very interested about the prospects of this company. I was baffled why no one was talking about it, so I decided to look into the company further to discover why. What I found is, what I believe, a rare investment opportunity.

Doubling Revenue Growth

NeoGenomics is in the business of cancer diagnostic testing, which is an incredibly competitive sector. Cancer diagnostic companies make money and generate revenue by selling sophisticated diagnostic cancer treatment tests to doctors and hospitals, and they receive compensation/reimbursement for insurance providers and Medicaid. Many companies in the sector are increasing their revenues through mergers and acquisitions. For example, see another article I wrote, on one of NEO's competitors, titled "Cancer Genetics: Unless Cash Flows Improve, More Dilution May Come Next." These mergers and acquisitions are occurring because normal organic revenue is hard to come by for many companies in this sector. However, organic revenue growth is not a problem for NeoGenomics.

a. Organic Growth

NeoGenomics had a record Q4'15. It reported a record quarterly revenue at $27.8 million, and a full year $99.8 million in revenues. That is 15% of YOY organic revenue growth. This growth is being driven by a 25% YOY increase of the base businesses sales volume. Today NeoGenomics produced more impressive results, by reporting a 36% YOY increase in its base genetic test volume. Management believes this organic revenue growth should continue to increase throughout 2016. In Fact, NeoGenomics has a strong history of great organic revenue growth. Its revenues have more than doubled since 2011.

This continued revenue growth has allowed NeoGenomics to become a breakeven company over the past couple of quarters. Its adjusted EBITA earnings per share were 5 cents for Q4'15. The entire Fluorescence in-situ Hybridation, FISH testing industry has been hit hard by a drastic cut in reimbursement rates set for 2015. However, unlike many of its peers, NeoGenomics has been able to offset these costs by significantly reducing the base costs of their tests. This has allowed NEO to have its margins at 44.8%.

b. Revenue Growth through M&A

On December 30, 2015, NEO closed a deal to acquire Clarient, Inc. Clarient had approximately $127 million in revenues for the year 2014. Management believes that the combined company should accelerate the revenue growth and improve the operating margins significantly. On March 1, 2016, management released guidance for 2016."Our financial guidance released this morning is for revenue to increase from $99.8 million to approximately $240 million to $250 million, which implies 145% increase at the midpoint of that range." As the quote, from Q4'15, indicates, revenues are on track to more than double in 2016. Management believes the combined company should make NeoGenomics a significantly more attractive testing provider. However, the Clarient acquisition has been better than management originally expected. Today NEO reported its Q1'16 earnings. The combined company accounted for $59.7 million in revenues. This was an increase of 159% YoY. Thus, management felt compelled to increase its revenue guidance for its full year 2016 to $242-252 million.

c. Risks

Every merger or acquisition poses risks. Sometimes the companies simply don't fuse together as well as management predicted they would have. A bad fusion of the companies could lead to decreased margins of operations and increased costs of doing business. Today's earnings report has given a good indication that the acquisition is on track to realize expectations. However, a 1 quarter glimpse should not be taken as an absolute indication how management is utilizing the new company and capitalizing on synergies. Investors should look to the operating costs, revenue growth, and margins to determine if management is trimming the fat from the acquisition.

Stock Ownership

The first thing that struck my eye of the company was who owned a large proportion of its shares. The institutional ownership of NEO is almost 74 percent. The Clarient deal made GE health care a 32 percent stake holder in the company. This interest from institutional investors and household brand names makes NEO very attractive. One of the basic rules of investing for individuals is to follow the smart money.

Conclusion

Even with all of the big splashes NEO is making in the cancer diagnostic test world, no one seems to be talking about the company. Firms like OPK and TROV are receiving all of the attention and allowing their valuations to be inflated. Currently, I believe that NeoGenomics is undervalued in comparison to its peers. That is why I am getting into the company before it becomes main stream. Once the financial world catches onto the moves Neo is making, its stock will only become more expensive.

Disclosure: I am/we are long NEO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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