Following Up On Fulgent Genetics (NASDAQ:FLGT)

Try not to become a man of success. Rather become a man of value.”― Albert Einstein.

Today, we put Fulgent Genetics, Inc. (NASDAQ:FLGT) in the spotlight for the first time since our last article on this small-cap concern back in February of this year. The company continues to navigate through the ‘Covid Cliff’ that so many diagnostic concerns are dealing with at the moment. However, the company sells for less than the net cash on its balance sheet, and “core” sales growth should return in FY2024. An updated analysis follows below.

Company Overview:

This Los Angeles headquartered diagnostic company is navigating through the ‘Covid Cliff’ as it adjusts to a more normalized existence after a temporary explosion of revenues thanks to the pandemic. The stock trades at just under $28.00 a share currently, with an approximate market capitalization of $820 million. Fulgent offers molecular diagnostic testing services, comprehensive genetic testing, and high-quality anatomic pathology laboratory services.

Third Quarter Results:

Fulgent posted its third-quarter numbers on November 3rd. The company had a non-GAAP loss of 39 cents a share, seven cents a share lower than the consensus. Revenues fell nearly 20% on a year-over-year basis to $84.4 million, which was some $20 million better than expectations. $19 million of that was due to Covid-related tests, while the rest was from “core” or recurring testing sales. Core revenue was down two percent from the second quarter of this year but up 17% from the same period a year ago. The company is seeing impressive growth from its Precision Diagnostics business, which posted $37.5 million worth of revenue for the quarter. This is up 17% from the second quarter of this year and 45% from 3Q2022. Operating expenses came down slightly from the second quarter of this year, which improved margins.

Leadership provided the following guidance for FY2023. Management expects core or non-Covid-related revenue of $260 million. The company is expected to post a non-GAAP loss of 95 cents in this fiscal year, or $2.15 a share on a GAAP basis as well.

Analyst Commentary & Balance Sheet:

Fulgent Genetics gets little coverage from Wall Street despite a decent market cap, perhaps as a result, as it has no need to raise capital. Piper Sandler did reissue its Hold rating and $28 price target on FLGT shortly after Q3 results were posted. It was the first analyst firm commentary on this company since March of this year.

Just under five percent of the outstanding float in the shares are currently held short. Several insiders have sold stock so far in 2023. Collectively they have disposed of just under $800,000 worth of equity. Management has guided that it expects to end FY2023 with $830 million worth of cash and marketable securities on its balance sheet. This is roughly equal to the stock’s current market cap. Fulgent ended the third quarter with just over $850 million worth of cash balances. Fulgent carries no long-term debt. The company bought back $2.2 million worth of its own stock during the third quarter. In October it bought back just over $13 million and still had $159 million on its stock buyback authorization.

Verdict:

Fulgent made $5.97 a share in profits in FY2022 on nearly $620 million in sales in FY2022. The two analyst firms that have projections believe the company will post a loss of a buck a share in FY2023 as revenues fall sharply to some $285 million. They see losses falling to 81 cents a share in FY2024 as sales rebound to just over $300 million.

Fulgent Genetics, Inc. continues to go through a transition following the Covid pandemic. Overall sales growth should return in FY2024. Fulgent also has one wildcard in its pipeline, called FID-007. This is a proprietary Nano encapsulated formulation of paclitaxel developed to improve the overall solubility profile of paclitaxel. FID-007 is targeting head & neck cancer, which could potentially be a $2 billion target market opportunity. It is still in early-stage development, and the company presented a poster presentation on this compound in November. Management recently submitted a Phase II clinical trial design protocol to the FDA around FID-007 and expects an initial study to commence in the first quarter of 2024.

Given the market cap of the company is less than the net cash on Fulgent’s balance sheet at the end of the third quarter, you are getting FID-007, $260 million of core sales in FY2023, and Fulgent’s other pipeline assets for “free.” The company also has the financial flexibility to make strategic ‘bolt on’ acquisitions to build out its product portfolio and boost growth as well.

I have a small holding in Fulgent within covered call positions, and this is how I plan to maintain a position in Fulgent while the company fully navigates through its Covid cliff.

Anything that just costs money is cheap.”― John Steinbeck.