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Here's Why Genomic Health Popped as Much as 30.2% Today

By Maxx Chatsko – Nov 7, 2018 at 12:48PM

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The genetic-testing leader kept up its impressive streak of profitable growth during the third quarter of 2018. It now expects earnings several times higher than previous estimates.

What happened

Shares of Genomic Health (NASDAQ: GHDX) rose over 30% today after the company reported third-quarter 2018 operating results. As the stock movement indicates, the genetic-testing leader had a pretty strong three months through the end of September.

The business delivered its first-ever quarter with at least $100 million in total revenue, which allowed it to generate $11.8 million in operating profit and $12.6 million in net income. That's a sharp improvement from the losses piled up through the first nine months of 2017. One look at its updated full-year 2018 net-income guidance shows it's going to get much better.

As of 12:03 p.m. EST, the stock had settled to a 23.7% gain.

A man sitting with his laptop as cash falls around him from above.

Image source: Getty Images.

So what

The strong showing in the third quarter of 2018 and through the first nine months of the year solidifies Genomic Health as perhaps the strongest business in the genetic-testing space. Investors can make that argument because the company's delivering a rare combination of revenue growth and profits. Smaller peer Invitae is growing at a handsome clip but piling up operating losses as it scales, and industry pioneer Myriad Genetics is profitable but has struggled to stem revenue declines from its legacy hereditary cancer-testing business, although a big acquisition in the summer of 2018 should provide growth in the all-important prenatal testing market.

Here's how the first nine months of 2018 compared to the year-ago period for Genomic Health:

Metric

First Nine Months of 2018

First Nine Months of 2017

Year-Over-Year Change

Total revenue

$289.5 million

$253.3 million

14%

Gross profit

$240.9 million

$212.4 million

13%

Operating income

$14.5 million

($8.6 million)

N/A

Net income

$16.8 million

($5.7 million)

N/A

Source: Press release.

Impressively, the business delivered $11.7 million in operating income and $12.2 million in net income in the third quarter of 2018 alone. The operational strength and momentum allowed management to increase full-year 2018 guidance -- by a mile. Genomic Health now expects total revenue for the year of about $390 million and net income of about $27 million, up from previous midpoint expectations of only $374 million and $2.5 million, respectively.

Now what

Mr. Market isn't overreacting to the news. Profitability is crucially important for genetic-testing companies because scaling such businesses has proven incredibly expensive. Genomic Health now has reached sufficient size and financial health that it no longer needs to rely on outside funding for growth -- or can do so at much more favorable terms than peers. Case in point: Genomic Health ended September with $183 million in cash and short-term investments, which is over $30 million more than the total from the end of June.

Investors now will have to remain vigilant to ensure that growth in future periods proves the business deserves a premium market valuation, but the business appears to have the wind at its back.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Genomic Health. The Motley Fool has a disclosure policy.

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