Earlier today, pharmacy operator Neighbourly Pharmacy (TSE: NBLY) released its first-quarter 2023 results for the period ended June 18, 2022, demonstrating high growth. While revenue missed expectations, earnings came in stronger than expected. Despite this, the stock finished about 9% lower today.
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NBLY mainly grows through acquisitions, and its acquisitions contributed to its momentum last quarter, allowing revenue to increase 34% to C$114.4 million.
However, it slightly missed expectations of C$115.8 million. Also, its adjusted EBITDA only grew 11%, reaching C$11.3 million. Neighbourly’s adjusted earnings per share also grew less than revenue, going from C$0.07 per share to C$0.09, a 28.6% increase.
Revenue growing faster than earnings shows that the company is not demonstrating operating leverage, causing its profit margins to decrease. Nonetheless, the company is still profitable, as it has a pro-forma adjusted EBITDA margin of 11.9% based on full-year pro-forma adjusted EBITDA of C$95.5 million compared to C$799.4 million in revenue. Also, adjusted EPS beat the C$0.05 per share estimate from analysts.
Further, NBLY’s same-store sales grew 1.8%. When excluding clinic format pharmacies, same-store sales grew 2.6%. Clinic format pharmacies are still being affected by COVID-19, as people are going to doctors’ offices less often, according to the company. NBLY now has 275 pharmacy locations after recently completing its large acquisition of Rubicon Pharmacies.
Wall Street’s Take on NBLY Stock
Turning to Wall Street, Neighbourly Pharmacy stock earns a Moderate Buy consensus rating based on three Buys and three Holds assigned in the past three months. The average NBLY stock price target of C$31.67 implies 49.9% upside potential from its current price of C$21.13.
One of the Buy ratings comes from notable RBC (RY) Capital analyst Irene Nattel, who is ranked #477 out of 21,000 overall experts tracked by TipRanks. Nattel assigned a C$38.00 price target nine days ago, which implies 79.8% upside potential.
Neighbourly Pharmacy’s Risks: Debt and Margin Contraction
While NBLY doesn’t appear to be a bad company, there are risks associated with its stock. Since most of its growth comes through acquisitions, it often takes on debt to finance these acquisitions.
In fact, NBLY has cash of about C$35 million and long-term debt of C$87 million. For now, this debt level is very manageable, but it is something that needs to be monitored, going forward. There’s always the possibility that NBLY can make poor acquisitions that will put them in lots of debt with relatively little profitability.
Also, as mentioned earlier, revenue increasing faster than earnings is not an ideal sign, as it signals margin contraction. Neighbourly’s gross margin has dropped from 42.8% in Fiscal 2018 to 37.1% in Fiscal 2022, signaling that its acquisitions may not be the greatest.
Conclusion: NBLY Beat Earnings, but the Results Weren’t Perfect
Neighbourly Pharmacy experienced solid revenue growth in its most recent quarter. However, profitability is having a hard time catching up despite the earnings beat. This, along with its debt, is something to keep an eye on. Nonetheless, the company is growing quickly while maintaining positive adjusted EBITDA. As a result, analysts are bullish on the stock and expect ample upside potential.
