Over the last six months, Penumbra’s shares have sunk to $251.37, producing a disappointing 12.6% loss - a stark contrast to the S&P 500’s 6.4% gain. This might have investors contemplating their next move.

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

Why Is Penumbra Not Exciting?

Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why you should be careful with PEN and a stock we'd rather own.

1. Fewer Distribution Channels Limit its Ceiling

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With just $1.28 billion in revenue over the past 12 months, Penumbra is a small company in an industry where scale matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.

2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Penumbra has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4%, subpar for a healthcare business.

3. Previous Growth Initiatives Haven’t Paid Off Yet

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Penumbra historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 0.3%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.

Final Judgment

Penumbra’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 58.4× forward P/E (or $251.37 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

Stocks We Would Buy Instead of Penumbra

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