Catalent: Reduced 2023 Outlook, but Stock Surges 16% on Healthy Customer Demand; Shares Undervalued

After Catalent CTLT twice delayed its fiscal-year third-quarter results, management stated during a business update call that it still needs more time to complete its earnings report. However, Catalent quantified its reduced outlook for the year by cutting its revenue guidance to $4.25 billion-$4.35 billion, down from its previous range of $4.625 billion-$4.875 billion, resulting in a 9% reduction at the midpoint. It also slashed its adjusted net income guidance by 66% at the midpoint to a range of $187 million-$228 million for 2023. We have adjusted our near-term forecasts based on this additional information and lowered our fair value estimate to $65 per share from $70. We maintain our narrow moat, stable moat trend, and high uncertainty ratings.

Catalent experienced operational issues and higher-than-expected costs at three of its manufacturing facilities, and management was overly optimistic about its previously stated fiscal-year 2023 guidance due to dramatic fluctuations in COVID-19 revenue as the world has moved into later stages of the pandemic. While Catalent faces these near-term issues, we continue to think shares are trading at a very attractive entry point in 5-star territory for long-term investors with a high degree of risk tolerance. We forecast 2023 revenue will reach nearly $4.28 billion.

Investors reacted favorably after the business update call and sent the stock up 16% on management’s positive comments about healthy customer demand and winning new business. We are pleased that management reiterated that its reduced outlook for fiscal 2023 was not due to any good manufacturing practice compliance issue or the loss of any customer or canceled order.

Catalent’s narrow moat is based on high switching costs, as the challenges associated with changing a drug’s manufacturing process create a sticky relationship for its customers. We see this moat source as helping sustain strong demand for Catalent’s development and manufacturing services.