Catalent: Management Cuts Guidance and Delays Earnings on Near-Term Issues; Shares Very Undervalued

We lower Catalent’s CTLT fair value estimate to $70 per share from $82 due to the company’s reduced fiscal 2023 guidance, which is due to operational and productivity issues and management’s uncertainty around its previously issued forecasts. As a result, it has delayed its fiscal third -quarter 2023 results by about a week. Despite these challenges, we continue to have a positive long-term outlook for the firm, and we view shares as very undervalued. The stock has experienced a significant pullback caused by near-term productivity issues and macroeconomic headwinds, and it dropped nearly 26% after management’s announcement. Narrow-moat Catalent’s shares are trading at their lowest price in three years, and this presents long-term investors with an attractive entry opportunity.

Management expects to reduce its net revenue and adjusted EBITDA guidance by more than $400 million each, representing an 8% and 32% decrease, respectively, from the company’s previously issued guidance in its fiscal second-quarter 2023 results in February. Management also identified significant issues with its forecasts over the past year, which it is working to address. Based on these challenges, we’ve raised our Morningstar Uncertainty Rating to High from Medium to reflect heightened near-term risks for the firm. In early November 2022, management dropped its 2023 guidance due to changes in market conditions, negative outlook received from some of its customers (cash-sensitive decisions from customers related to inventory levels), inflation, foreign exchange headwinds, and supply chain pressures.

While Catalent faces these near-term challenges, we think shares are trading at a very attractive entry point in 5-star territory for long-term investors. We forecast 2023 revenue to reach about $4 billion, representing about a 16% decrease year over year, due to lower COVID-19-related revenue, near-term productivity issues affecting three of its facilities, and macroeconomic disruptions.