PPL (PPL -0.47%), Organon (OGN 2.89%), and Lordstown Motors (RIDE -2.26%) may seem underpriced according to their historical averages, but as plenty of investors know, better past performance is not an indicator of better future results. All three of these stocks have fundamental warning signs that should scare off all but the least risk-averse of investors.
Sometimes the collective market is right. Shares of PPL and Organon are down slightly this year and Lordstown's shares have fallen off a cliff. There are reasons why I don't see any of them climbing out of their doldrums any time soon.
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PPL: Not all utilities stocks are safe bets
PPL's dividend yield of 5.8% is tantalizing. At first glance, the stock seems like a good choice for an income-oriented investor. Utility companies are generally considered stable investments, but I'd stay away from this one.
The company just sold off its U.K. utility business for $10.5 billion. While the company said between $3 billion and $3.5 billion from the sale will be used to pay down debt, the sale will also negatively impact the company's free cash flow, which could mean a dividend cut is coming.
PPL's revenue and net income have declined for the past two years and in the first quarter, the utility company reported a net loss of $1.89 billion, even though revenue was up a reported 4% to $1.498 billion. None of that information makes the stock a screaming buy, even 22% below its three-year high.
Organon has been on a downward trend
Organon (OGN 2.89%), a former division of Merck that completed its spinoff from the parent company last month, has seen declining revenues for three consecutive years, according to documents Merck filed with the SEC. The company specializes in women's health and biosimilar therapies, but doesn't have a blockbuster drug. None of its drugs are individually responsible for more than 11% of the company's sales. The company doesn't expect revenue growth to exceed single digits this year.
Besides the downward trend in revenue, I have several other concerns about Organon, especially for this year. As a new company, it will face typical restructuring costs that will cut down on net income. On top of that, it's carrying a large amount of debt -- estimated by the company at $9.5 billion -- that it needs to pay down. Also, the main reason for the company's lagging revenue isn't going away -- a loss of exclusivity (LOE) for some of its lead drugs. In the first quarter, the company's sales were $1.5 billion, down 15% year over year.
NuvaRing, a birth control method, was once a big seller for Organon, but it lost patent protection in April 2018 and started facing competitors in December 2019. Its first-quarter sales were $45 million compared to $63 million in 2020. The company's current sales leader, birth control implant Nexplanon, doesn't lose exclusivity in the U.S. until 2027 and in the EU until 2025, but it also saw declining sales in the first quarter of $183 million, down from $195 million in the same period in 2020.
The company estimated that LOE will cost between $400 million and $500 million in this year alone.
Lordstown Motors is driving in the wrong direction
I shouldn't have to warn you about the dangers of investing in a company under investigation by the Department of Justice (DOJ), but Lordstown Motors' share price decline of more than 20% this month and more than 55% this year may be enough to attract bargain hunters.
Even if the DOJ and the SEC weren't looking into the embattled electric vehicle maker, there are plenty of reasons to be wary of Lordstown. In the first quarter, the company reported a loss of $125 million in net income. On top of that, the company downgraded its production estimates for its electric pickup truck, Endurance, by at least 50% for the end of the year, adding it expects to see its cash reserves dwindle from $587 million to between $50 and $75 million by the end of the year.
Lordstown also will face increasing EV sales pressure, if and when it gets a product. Ford has announced plans for an electric F-150 truck and Stellantis has several EV models in the works, not to mention, of course, the EV models already being sold by Tesla, BMW, Renault-Nissan, and General Motors, all of which have resources that tower over Lordstown Motors'.
I'm not against risk, but...
If you're going to take a calculated gamble, do it with companies that are already showing strong revenue growth. These three may appear to be bargains, but in reality, they could sink a lot lower in the coming year. You're better off looking for companies that are confident about their growth prospects in that period and beyond.