Novanta (NOVT)

Medicine and manufacturing technology provider Novanta (NASDAQ:NOVT) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 1.1% year on year to $233.4 million. On the other hand, next quarter’s revenue guidance of $235 million was less impressive, coming in 2.4% below analysts’ estimates. Its non-GAAP profit of $0.74 per share was 9.9% above analysts’ consensus estimates.

Company Overview

Originally a pioneer in the laser scanning industry during the late 1960s, Novanta (NASDAQ:NOVT) offers medicine and manufacturing technology to the medical, life sciences, and manufacturing industries.

Like many equipment and component manufacturers, electronic components companies are buoyed by secular trends such as connectivity and industrial automation. More specific pockets of strong demand include data centers and telecommunications, which can benefit companies whose optical and transceiver offerings fit those markets. But like the broader industrials sector, these companies are also at the whim of economic cycles. Consumer spending, for example, can greatly impact these companies’ volumes.

Competitors offering similar products include Danaher (NYSE:DHR), MKS Instruments (NASDAQ:MKSI), and Coherent (NASDAQ:COHR).

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Thankfully, Novanta’s 8.8% annualized revenue growth over the last five years was decent. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Novanta’s recent performance shows its demand has slowed as its annualized revenue growth of 4.2% over the last two years was below its five-year trend. We also note many other Electronic Components businesses have faced declining sales because of cyclical headwinds. While Novanta grew slower than we’d like, it did do better than its peers.

This quarter, Novanta grew its revenue by 1.1% year on year, and its $233.4 million of revenue was in line with Wall Street’s estimates. Company management is currently guiding for flat sales next quarter.

We also like to judge companies based on their projected revenue growth, but not enough Wall Street analysts cover the company for it to have reliable consensus estimates.

All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

Novanta has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 43.9% gross margin over the last five years. Said differently, roughly $43.93 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

In Q1, Novanta produced a 44.7% gross profit margin, up 1.2 percentage points year on year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Novanta has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 12.5%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Novanta’s operating margin rose by 3.8 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Novanta generated an operating profit margin of 13.9%, up 1.8 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Novanta’s EPS grew at an unimpressive 7.7% compounded annual growth rate over the last five years, lower than its 8.8% annualized revenue growth. However, its operating margin actually expanded during this time, telling us that non-fundamental factors such as interest expenses and taxes affected its ultimate earnings.

Diving into the nuances of Novanta’s earnings can give us a better understanding of its performance. A five-year view shows Novanta has diluted its shareholders, growing its share count by 1.6%. This dilution overshadowed its increased operating efficiency and has led to lower per share earnings. Taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Novanta, EPS didn’t budge over the last two years, a regression from its five-year trend. We hope it can revert to earnings growth in the coming years.

In Q1, Novanta reported EPS at $0.74, in line with the same quarter last year. This print beat analysts’ estimates by 9.9%. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Novanta has shown robust cash profitability, enabling it to comfortably ride out cyclical downturns while investing in plenty of new offerings and returning capital to investors. The company’s free cash flow margin averaged 13% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that Novanta’s margin dropped by 7.5 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Novanta’s free cash flow clocked in at $27.4 million in Q1, equivalent to a 11.7% margin. This cash profitability was in line with the comparable period last year but below its five-year average. In a silo, this isn’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Novanta’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 10.4%, slightly better than typical industrials business.

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. Uneventfully, Novanta’s ROIC has stayed the same over the last few years. Given the company’s underwhelming financial performance in other areas, we’d like to see its returns improve before recommending the stock.

Novanta reported $106 million of cash and $428.8 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $210.1 million of EBITDA over the last 12 months, we view Novanta’s 1.5× net-debt-to-EBITDA ratio as safe. We also see its $28.88 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Novanta beat analysts’ EPS expectations this quarter. On the other hand, its revenue and EPS guidance for next quarter fell short. Overall, this quarter could have been better. The stock traded down 12.3% to $105.01 immediately following the results.

Updated: May 22, 2025 at 11:18 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Novanta, you should also grasp the company’s longer-term business quality and valuation.

Novanta isn’t a terrible business, but it doesn’t pass our bar. .

Novanta’s EV-to-EBITDA ratio based on the next 12 months is 24.2x. This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $147.32 on the company (compared to the current share price of $121.90).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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