Most companies are scheduled to report first-quarter 2020 earnings in the next few weeks. When they do, they're likely to provide updated full-year 2020 outlooks that incorporate the effects of the coronavirus pandemic on operations. Investors might be surprised by the broad impacts from stay-at-home orders.
Take NeoGenomics (NASDAQ:NEO) as an example. The oncology reference lab designs and processes tests and interprets data workups for hospitals large and small. Cancer screening tests might be thought of as essential, but they're not immune to stay-at-home orders. The company reported that test volumes declined 20% in the final two weeks of March and in early April compared with the year-ago period.
Therefore, the most important thing for investors to watch when NeoGenomics reports first-quarter 2020 earnings on April 28 is simple: How long does management expect the slowdown to last?
An obstacle to growth
NeoGenomics is a pure-play oncology reference lab. The business offers a comprehensive menu of laboratory tests doctors typically use to diagnose, monitor, and assess the health of patients who might have, do have, or have had cancer. It offers diagnostic test kits, processes samples at one of its 11 global locations, and returns the data to customers. If requested, then the company's 100-plus doctors and pathologists can help customers interpret data, too.
While the company designs high-quality tests to meet the needs of the more than 2,600 hospitals and cancer centers it serves, NeoGenomics remains a non-competitive clinical services partner. In other words, it doesn't broadly market tests that might compete with those from customers, such as regional hospitals.
NeoGenomics also maintains a pharmaceutical services business segment that helps biopharma customers to develop diagnostic tests of their own or identify drug targets. In 2019, the clinical services segment generated $361 million in revenue, representing 88% of total revenue. The pharmaceutical services segment was responsible for the remainder of sales. While the latter is much smaller, it has intriguing growth potential. For example, it began 2020 with a backlog of $145 million.
But investors might be nervously questioning what's around the corner for the growth stock. On April 9, NeoGenomics told investors it expects first-quarter 2020 revenue to have grown 11% compared with the year-ago period. It also attempted to set expectations for the second quarter of the year:
The company is withdrawing its previously issued full year 2020 financial guidance in light of uncertainty surrounding the ongoing and evolving COVID-19 pandemic. While revenue trends remained strong in the first two months of the quarter, the company did see a material impact to volume growth rates in the last two weeks of March. Clinical test volume grew approximately 7% year-over-year in the first quarter, but was down approximately 20% year-over-year in the last two weeks of March and in early April.
Investors were already expecting relatively low growth rates this year. While the integration of a major acquisition pushed full-year 2019 revenue 48% higher from the year-ago period, initial full-year 2020 guidance suggested year-over-year revenue growth of 15% at the midpoint.
How much and for how long will the coronavirus pandemic affect testing volumes? The answer might not matter too much for investors with a long-term mindset, but it will still have implications worth considering.
As a business, NeoGenomics is well positioned to weather a prolonged downturn. The company had $173 million in cash at the end of 2019 and has generated positive operating cash flow for five consecutive years. If revenue falls too much, then operating margins could turn negative, especially considering the significant increases in operating expenses in recent years. But the business would bounce back once testing throughput returned to its pre-pandemic trajectory.
As a stock, NeoGenomics is a little more fragile. A market valuation of $3.2 billion values the business at 382 times trailing earnings and 7 times sales. That's not unusual for a growth stock, but investors don't know how Wall Street will react to a slowdown in test volumes.
A long-term growth stock with short-term problems
NeoGenomics offers investors a rare combination of growth and profits. While the coronavirus pandemic will surely derail that growth trajectory in the short term, the business is well positioned to quickly jump back on track once stay-at-home orders are loosened.
For example, even though the business has relied on acquisitions to fuel growth in recent years, the genetic testing industry remains highly fragmented. There's no reason to think the coronavirus pandemic will nudge the company too far off its long-term growth trajectory. In fact, if smaller peers are pushed to the brink, then NeoGenomics could emerge from the coming recession with a bevy of acquisition opportunities available.
That said, investors with a long-term mindset will still want to wait for management to provide an updated outlook. If the stock falls in the coming weeks or months, then investors will get a much better entry point compared with current levels.