Evotec - Still A Speculative Buy After A Significant Decline (NASDAQ - EVO) - Seeking Alpha

26/04/2024, 14:58 Evotec _ Still A Speculative Buy After A Significant Decline (NASDAQ _ EVO) _ Seeking Alpha
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Evotec: Still A Speculative Buy After

A Significant Decline
Apr. 24, 2024 9:41 AM ET | Evotec SE (EVO) Stock | 1 Comment | 1 Like
Wolf Report
Investing Group Leader
Summary
Evotec SE's stock has declined over 30% in a single day, marking a 5-year
decline of over 56%.
The company's 2023A results met guidance, but the market expected more
from the 2024E forecasts.
The change in reporting structure and the stepping down of the CEO have
also contributed to the decline in share price. I am still saying "Spec BUY",
but with care.
I am Wolf Report, a senior analyst and private portfolio manager with 10+
years experience finding ideas in European and North American markets. I
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am a contributing author for the investing group iREIT on Alpha.
Trevor Williams
Dear readers/followers,
Drug discovery investing is something I am very careful about. That is why in my

former article on Evotec SE (NASDAQ:EVO), which by the way you can find
here, I called the company a "spec BUY" - and even in the title made a case for
why a larger, scaled competitor was, in fact, a better investment.
However, given the morning's price action and the fact that I am the latest
contributor to share my views on this company and that I do have a small
position in the company, this is a perfect opportunity for me to be clear about my
convictions and where, if anywhere, I have made a mistake.
A 35% decline is never something an investor wants. Don't let any contributor,
analyst, or investor tell you differently that they "expected this" - if they had, they
wouldn't have invested. It's always something that is a short-term net negative,
even if the longer term might look different.
With that in mind, let's look at the reason why the company declined, and what,
if any upside could exist for the company as it trails down to below, or close to
€10/share for the native ticker.
Evotec SE - An update following a volatile pre-trade and

trend.
As I am writing this article, the native ticker for Evotec SE is crashing over 30%
in a single day. This marks a 5-year decline of over 56%, which is a terrible
result to have to reconcile. Now, I myself did not invest at slightly such a terrible
price, and the FX means that after today, I'm still "only" down around 40%, but
it's still not a situation that I want to find myself in.
That being said, as I said in my initial article on Evotec, my position is very

small. We're talking below 0.1%. That makes this an interesting case study that I
can even view very objectively, rather than if the position was 5%, where I would
probably be emotionally impacted by such a volatile move.
Evotec IR (Evotec IR)
Evotec is a difficult business. The reasons for this come down to the volatility of
the process and the resulting finances. It's a space where you can make a lot of
money, and I know investors who have made their fortunes from this sector, but
I know many who have lost significant amounts of capital in the sector as well.
And since I last wrote those words, I have actually met an investor who lost 60%
of his fortune in one "bet" in this sector. It's not an easy sector to work in or to
get "good" in.
What differs Evotec from say, Roche or Merck (MRK), is that you're investing
strictly in what the vernacular is known as the "discovery cycle". This is an
extremely capital-intensive process, with some estimates now going as high as
each discovery of an NCE, or a molecular entity with a therapeutic potential
value was over $5B (Source).
Again, this is not exactly making a case for this sort of investment, when you
consider the risk of losing all of that capital and starting, oftentimes, at zero.
I also made clear that Evotec is not the best company at what it does. It's an
average business, from core KPIs, and it has not improved all that much since I
last wrote about the company either. The company reported results today - that
is why we're seeing the massive drop.
And this drop is coming despite a 2023A result that fully met the updated
guidance. However, whenever I see the wording "priority reset", I know
something is happening - especially when the company is talking about
annualized EBITDA improvements of less than €50M per year, which is what the
company is doing here.
Also, Evotec has announced that the company is changing the entire reporting
structure, with an updated structure that's only two segments starting in 1Q24
already.
Revenues were up 4%, the problem wasn't there. From Biologics, they were up
111%, which was amazing, but base business excluding Just Biologics, it was
down 10% as a result both of cyberattack, a lower gross margin, an adjusted
EBITDA that fell almost 35% (€15M of which was cyberattack), and the company
has given us 2024E outlook/guidance based on a double-digit revenue growth
for the entire growth, a reduction of development expense, and reversal in group
EBITDA.
None of this sounds particularly terrible, so what exactly is the problem here?
The simple fact is that the market expected more out of Evotec - especially
when it came to the 2024E forecasts. These forecasts were characterized very
conservative/cautious (Source: RBC), and the turnover and operating profit
going forward are, in fact, likely here to fall short of market - as well as a
question about the medium-term outlook for the company.
Management doesn't share the caution, with the tone being positive, but
uncertainty for 2024-2025 here is clear - and there has been a historical bias
towards expecting too much out of what is, clearly, an average drug discovery
company (Source: FactSet, S&P Global).
The stepping down of the long-standing CEO, W. Lanthaler was also not a
positive here. The expectation is for new management to lead Evotec back into
stability, yet how this is to be done is, as of this time, somewhat unclear also to
me.
But do I think that these trends justify a 30%+ drop in the share price? No, not
really. The company has always been volatile, and it's inherent in the method to
these businesses that there's a degree of exuberance and positivity as to their
expectations and forecasts.
As I am writing these lines, we're back to below €10/share, which is a long time
ago since we've seen the company.
Let's look at risk and upside for the business, and where we have the company
on a forward basis.
Risks & Upside for Evotec SE

Going into the results, the sentiment was positive. There was a positive outlook
to growth thanks to the CDMO outsourcing trends and a company investment in
its discovery pipeline. I would say it's justified to characterize these current
expectations for the short term as "shattered". Bullish arguments for Evotec,
such as the focus on building out its manufacturing capacity, outsourcing skill,
and commercial success of the company's proprietary assets all need to be put
into context of what is happening with the company at this time - even if it can be
argued that high-margin recurring royalty revenue is not only possible but likely.
The competitive market is really the biggest argument here, and one of the
reasons I am so cautious with companies like Evotec. It causes a lag in organic
growth, and especially services that could be characterized as non-premiumized
are seeing pressure. But the arguments of the core risk to drug discovery, or the
proprietary assets could actually fail to reach commercial success. The company
already has one segment which is essentially a drag on profits and resources
due to massive research expenses and the like.
So the overall risk/reward has not materially changed since my last article.
Valuation for Evotec SE

It's fair to say, in my estimate, that this market reaction to the earnings has
caught the market off-guard. Most estimates remain at the €13-€15/share level
for the business. My own was at €13.4, and it remains here as of this article. It's
a Spec buy - it remains a Spec buy as well, I'm not shifting it an inch here.
It is a potentially attractive business if you're interested in more volatile and risky

investments but with a potentially higher payoff.
And Evotec, which trades on the Nasdaq under EVO, could potentially deliver
returns far higher than some people believe. The company has no real S&P
Global rating and cannot be evaluated under the same KPIs as other
businesses. This is because the company has a P/E of negative 115x and an
EPS yield of negative 0.86%. It was negative in EPS for 2022 and for 2023 as
well, with an estimated EPS on an adjusted basis for 2024 at €0.08/share - no
dividend. The same is true for the next few years of forecasts - no dividends
there either.
Analysts tend to be very positive about this stock. I would say that the closest
peers are Charles River (CRL), Lonza (LONN), and Catalent (CLTL), none of
which I currently cover or consider appealing on a conservative basis. Evotec,
after today, trades at a significant peer discount on a Sales, and book basis.
Morningstar, based on these trends, has the company at €14/share (not updated
for today yet), and S&P Global analysts come from a high of €50/share and a
low of €14/share. You can see from the get-go that this is not an easy business
to forecast, with a spread that's one of the biggest I have ever seen. 10 analysts
follow the company - half of them at "BUY", half of them at "HOLD",
Underperform, or other ratings. There's very little clarity to be had here - and I
would love to partake in the analysis of the person who estimates them at
€50/share, given that we are now at a fifth of this target and I don't see any
meaningful competitive advantage for this company beyond its actual price,
given that it is not by any KPI-measure an outperformed.
Overall, I say in closing that today's crash is not something I view as justified by
the results or by the forecasts. I view this as an overreaction from an inflated
market. However, at the same time, I don't necessarily view this as an appealing
business to currently invest in, even if I still say it's a potential "spec buy". If the
company was to manage current forecasts, then a normalized 60x P/E (which is
where the company trades on a 20-year basis), would imply a 330%+ RoR.
But this is too speculative for my taste, and would caution care here. I'm keeping
my position, and keeping an eye on the company, but I'm not buying more here.
My thesis on Evotec SE is as follows.
Thesis
Evotec is an attractive company in the medical/drug discovery field. It has
an attractive pipeline, decent fundamentals, and a growth rate not matched
by many companies in either the sector or the market, having grown from
less than €100M to potentially over €1.3B in this coming fiscal in terms of
revenues, updated for November 2023.
However, plays like this are risky - and my risk tolerance at this time is
limited. I view it best to err on the side of safety and pick history and quality
in these sectors, with predictability. For now, that is not Evotec.
The company is a theoretically attractive speculative "BUY" with a price

target of €25/share for the native - but that is as high as I am currently
willing to go. For the Nasdaq ticker, as of November of 2023, that's around
$13.4/share.
Remember, I'm all about :
1. Buying undervalued - even if that undervaluation is slight, and not mind-

numbingly massive - companies at a discount, allowing them to normalize over
time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I
harvest gains and rotate my position into other undervalued stocks, repeating
#1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or
goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows
as specified in #1.
Here are my criteria and how the company fulfills them (italicized).
This company is overall qualitative.
This company is fundamentally safe/conservative & well-run.
This company pays a well-covered dividend.
This company is currently cheap.
This company has a realistic upside based on earnings growth or multiple

expansion/reversion.
Three out of five is not good enough for a conservative investment, but it's good
enough for a "spec buy" here.
This article discusses one or more securities that do not trade on a major U.S.
exchange. Please be aware of the risks associated with these stocks.
The company discussed in this article is only one potential investment in the
sector. Members of iREIT on Alpha get access to investment ideas with upsides
that I view as significantly higher/better than this one. Consider subscribing and
learning more here.
This article was written by
Wolf Report
33.2K Followers
Wolf Report is a senior analyst and private portfolio manager with over 10 years generating value ideas
in European and North American markets.
He is a contributing author for the investing group iREIT on Alpha where in addition to the U.S. market,
he covers the markets of Scandinavia, Germany, France, UK, Italy, Spain, Portugal and Eastern Europe
in search of reasonably valued stock ideas. Learn more.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of EVO either through stock ownership, options,
or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it
(other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this
article.
While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to
give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to
do their own due diligence and research prior to any investment. Short-term trading, options trading/investment, and
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limited capital, limited investment experience, or a lack of understanding for the necessary risk tolerance involved. The
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26/04/2024, 14:58 Evotec _ Still A Speculative Buy After A Significant Decline (NASDAQ _ EVO) _ Seeking Alpha

Home Stock Ideas Long Ideas Healthcare Germany

Evotec: Still A Speculative Buy After

am a contributing author for the investing group iREIT on Alpha.

Drug discovery investing is something I am very careful about. That is why in my

Evotec SE - An update following a volatile pre-trade and

That being said, as I said in my initial article on Evotec, my position is very

Evotec IR (Evotec IR)

Evotec IR (Evotec IR)

Evotec IR (Evotec IR)

Risks & Upside for Evotec SE

Valuation for Evotec SE

It is a potentially attractive business if you're interested in more volatile and risky

My thesis on Evotec SE is as follows.

The company is a theoretically attractive speculative "BUY" with a price

Remember, I'm all about :

1. Buying undervalued - even if that undervaluation is slight, and not mind-

This company is overall qualitative.

This company is fundamentally safe/conservative & well-run.

This company pays a well-covered dividend.

This company is currently cheap.

This company has a realistic upside based on earnings growth or multiple

This article was written by

Comments (1) Sort by Newest

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