Over the past six months, Premier’s shares (currently trading at $17.93) have posted a disappointing 13.5% loss, well below the S&P 500’s 6.2% gain. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Premier, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Even with the cheaper entry price, we're cautious about Premier. Here are three reasons why you should be careful with PINC and a stock we'd rather own.
Why Do We Think Premier Will Underperform?
Founded in 1968, Premier (NASDAQ:PINC) offers tech-forward products for healthcare organizations focused on cost management, quality improvement, and supply chain optimization.
1. Long-Term Revenue Growth Flatter Than a Pancake
A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Premier struggled to consistently increase demand as its $1.18 billion of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and signals it’s a low quality business. 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Premier’s revenue to drop by 15.9%, a decrease from its 6.9% annualized declines for the past two years. This projection doesn't excite us and indicates its products and services will face some demand challenges.
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, Premier’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Premier doesn’t pass our quality test. Following the recent decline, the stock trades at 14.3× forward price-to-earnings (or $17.93 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of Premier
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