Over the last six months, Tandem Diabetes’s shares have sunk to $22.45, producing a disappointing 13.7% loss - a stark contrast to the S&P 500’s 10.5% gain. This might have investors contemplating their next move.
Is now the time to buy Tandem Diabetes, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Tandem Diabetes Will Underperform?
Even though the stock has become cheaper, we’re sitting this one out for now. Here are three reasons we avoid TNDM, plus one stock we’d rather own.
1. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Tandem Diabetes, its EPS declined by 83.1% annually over the last five years while its revenue grew by 11.5%. This tells us the company became less profitable on a per-share basis as it expanded.
2. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Tandem Diabetes’s five-year average ROIC was negative 47.1%, meaning management lost money while trying to expand the business. Its returns were among the worst in the healthcare sector.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Tandem Diabetes’s $739.3 million of debt exceeds the $456 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $44.82 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Tandem Diabetes could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Tandem Diabetes can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We cheer for all companies helping people live better, but in the case of Tandem Diabetes, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 22.3× forward EV-to-EBITDA (or $22.45 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward the Amazon and PayPal of Latin America.
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