Catalent Earnings: Investors’ Fears Are Allayed and Stock Jumps 10%, Shares Remain Undervalued

After a lengthy delay, Catalent CTLT released its third-quarter 2023 financial results highlighted by a net loss of $227 million for the quarter, compared with net earnings of $141 million in the prior-year period. The third quarter’s net loss includes a goodwill impairment of $210 million in its consumer health business, which is related to its 2021 acquisition of Bettera Wellness. Additionally, Catalent amended its 2022 annual report due to a $26 million error related to the over-recognition of revenue at its Bloomington, Indiana, facility.

Management updated its fiscal-year 2023 guidance to $4.23 billion-$4.33 billion, down slightly from its previous guidance of $4.25 billion-$4.35 billion announced during its business update call in May. Catalent also reduced its adjusted EBITDA guidance by 3% at the midpoint to $700 million-$750 million. Investors reacted favorably and sent the stock up 10%, as Catalent’s results were better than anticipated. We maintain our fair value estimate of $65 per share, and we reaffirm our narrow moat, stable moat trend, and High Uncertainty ratings.

Catalent has experienced operational issues and higher-than-expected costs at three of its manufacturing facilities, and management had been overly optimistic about its previously stated fiscal-year 2023 guidance due to dramatic fluctuations in COVID-19 revenue as the world moved into later stages of the pandemic. While Catalent faces these near-term issues, we continue to think shares are trading at an attractive entry point for long-term investors with a high degree of risk tolerance. We forecast 2023 revenue will reach about $4.26 billion.

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 are seeing this moat source help sustain strong demand for Catalent’s development and manufacturing services.