What a brutal six months it’s been for Omnicell. The stock has dropped 24.6% and now trades at $32.45, rattling many shareholders. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in Omnicell, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Despite the more favorable entry price, we don't have much confidence in Omnicell. Here are three reasons why you should be careful with OMCL and a stock we'd rather own.

Why Do We Think Omnicell Will Underperform?

Driven by the vision of an "Autonomous Pharmacy" with zero medication errors, Omnicell (NASDAQ:OMCL) provides medication management automation and adherence tools that help healthcare systems and pharmacies reduce errors and improve efficiency.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Omnicell grew its sales at a mediocre 4.4% compounded annual growth rate. This was below our standard for the healthcare sector.

2. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for Omnicell, its EPS declined by 9.6% annually over the last five years while its revenue grew by 4.4%. This tells us the company became less profitable on a per-share basis as it expanded.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Omnicell’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

Omnicell falls short of our quality standards. After the recent drawdown, the stock trades at 17.5× forward price-to-earnings (or $32.45 per share). This valuation tells us a lot of optimism is priced in - you can find better investment opportunities elsewhere. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

Stocks We Would Buy Instead of Omnicell

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