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In November I concluded: Fortrea Holdings (Nasdaq:FTRE) announced very mixed third-quarter results.CRO business spun off from LabCorp (left)stock prices were falling from the late 30s to the mid-20s. Investors were concerned about flat sales and declining profits. This allowed the company to utilize significant leverage, resulting in a significant increase in the stock price.
Meanwhile, the company has aimed for modest growth and announced significant sales to reduce leverage, but the real issue of a fundamental lack of profitability remains a major concern.
CRO business
Fortrea is a pure CRO (Clinical Research Operator), offering not only clinical development services but also some validation services used by pharmaceutical and biotech companies in stages 1 to 4 of drug development. Masu.
Research and development costs from these The total industry size is a quarter trillion, so even though the targeted sub-segments are a bit smaller, this business is serving a huge addressable market.
The company employs approximately 12,000 people in approximately 100 countries and reported 2022 sales of $3.1 billion and EBITDA of $405 million. Please note that these are results reported as part of and within LabCorp.
The spinoff from LabCorp took effect last summer, as the situation was quite complicated. Immediately after the spin-off, the company announced its second quarter financial results in August, posting roughly flat annual revenue of $793 million. Operating income decreased from $71 million to $33 million. This was because it was difficult to disentangle how much of the decline in profits was due to general margin pressure and how much was related to costs incurred by operating a standalone company.
Additionally, the reported results are not yet affected by net debt, which was estimated at $1.52 billion at the time of the spin-off. EBITDA trended down significantly to approximately $270 million, and leverage ratio exceeded 5x. Furthermore, the interest expense incurred will consume almost all of the operating income.
The 88 million shares gave the company a $2.3 billion equity valuation at $26 per share, giving it a $3.8 billion valuation. This seemed like a reasonable number at just over 1x his sales, but now that EBITDA multiples have tightened up, his performance on this metric is expected to drop to his $270 million.
It has been very difficult to paint a clear picture here, as many variables play a role, such as corporate cost overruns, distractions from separation, and debt overruns. The situation improved a bit in the third quarter, with sales up 2% to his $776 million, and his sales-to-sales ratio at an impressive 1.24x. The orders further increase the backlog, which now stands at $7.1 billion (equivalent to two years’ worth of revenue).
Operating income decreased from $69 million to $14 million, with a $35 million quarterly interest charge resulting in a GAAP loss of $13 million. Adjusted EBITDA was $70 million, and the company expected 2023 sales of $3.1 billion and EBITDA of approximately $270 million. This suggests that fourth quarter revenue of $769 million and EBITDA of $70 million will be broadly in line with third quarter results. Despite a relatively strong third quarter, the downside was clear and it was very difficult to be optimistic.
Stuck at $33
The stock price has risen from $33 in November to $40 per share in recent weeks, but has now sold back down to $33 per share.
In March, the company announced Sale of Endpoint’s clinical and patient access business to Arsenal Capital Partners. These two segments are part of the Enabling Services segment, which generated his total revenue of $270 million in 2023.
This price tag comes as the company receives a price tag of $345 million, of which $295 million will be paid upon completion of the transaction and the remainder upon achieving certain milestones. It was announced at the time. 2023 Conference phone The company disclosed that the assets sold generated sales of $250 million and EBITDA of $30 million. Including milestone-related payments means Fortrea had a sales multiple of 1.4x and an EBITDA multiple of 11.5x on these assets.
In March, the company Posted This year’s results were mixed. Revenue for the fourth quarter was $775 million, up 2% year over year, but it’s clear that adjusted EBITDA was $67 million. His sales ratio for the fourth quarter was an impressive 1.30x, and his backlog increased by $7.4 billion. The question was when would this lead to more impressive growth (and profits)?
Despite the growing backlog, 2024 sales are expected to be between $3.14 billion and $3.25 billion, a very modest increase from 2023 sales of $3.19 billion. That was somewhat disappointing. This guidance does not include the impact of the sale, so EBITDA is expected to increase from $267 million to $280 million in 2023 to $320 million. is expected.
Net debt is reported to be $1.52 billion, and the sale could reduce it to about $1.22 billion before transaction costs, or increase it a little more with milestone relayed payments. EBITDA is expected to be $270 million on a pro forma basis and we believe the leverage ratio is approximately 4.5x.
It remains incredibly difficult for the company to remain profitable. Based on the 2023 EBITDA figure of $267 million, we start with $42 million in structural equity-based compensation components, $140 million in interest expense (which is slightly lower), and depreciation. Amortization expense must be recognized. The real problem here still remains, the lack of real profitability.
The company reported fourth-quarter adjusted earnings of $16 million, but after adjusting for $15 million in stock-based compensation expense, there was no real benefit.
What now?
The outlook for 2024 wasn’t very exciting, so it was hard to understand why the stock rose to the $40 level in February. The stock price is currently down because of Fortrea, not because of its 2023 results or 2024 outlook. announced The day before the scheduled first quarter earnings release, it was announced that additional time is required to account for and operate the divested assets that are part of the Enabling Services segment. Such warnings are of no comfort. Of course, not the day before the scheduled release.
While the latest news is somewhat concerning, the asset sales should alleviate most of the leverage concerns. Shares could rise as leverage concerns ease and backlog turns into real earnings growth, but real earnings growth is still lagging here.
With approximately 90 million shares now valued at $3 billion, the company is still valued at $4.2 billion, which translates to a multiple of 1.3x sales and approximately 15x pro forma EBITDA. This looks pretty grim given the lack of real profitability, as creating attractiveness requires real growth and margin increases, which is far from a given here. Masu. Because of this, I would be very cautious here.
