Why I Sold Celyad SA (NASDAQ:CYAD)

Celyad SA (NASDAQ:CYAD) is a company I’ve been following for a while, and one that I believe the market is over-hyped about. My concerns are mainly around the sustainability of its future growth, the opportunity cost of investing in the stock accounting for the returns I could have gotten in other peers, and its cash-to-debt management. Whether a company has a good future, in terms of its business operation and financial health, is an important question to address.

First, a short introduction to the company is in order. Celyad SA, a clinical-stage biopharmaceutical company, focuses on the development of CAR-T cell-based therapies. Started in 2004, it operates in Belgium and is recently valued at US$322.82M.

The top-line decline of -58.47% was the first metric I noticed about CYAD. A consensus of 5 US biotechnology analysts covering the stock indicates the future doesn’t look much better. Looking at their predictions, CYAD’s revenue level is expected to decline by 163.84% in the next financial year. As CYAD is currently loss-making, this revenue headwind is expected to negatively impact its bottom-line, which should see a further decline from -€56.39M to -€35.04M over the same time period.

NasdaqGM:CYAD Future Profit May 21st 18
NasdaqGM:CYAD Future Profit May 21st 18

Investors tend to get swept up by a company’s growth prospects and promises, but a key element to always look at is its financial health in order to minimize the downside risk of investing. A major red flag for CYAD is that its cash generated from its business is less than its outgoing cash expenses. This means that, although debt is relatively minimal (3.04% of equity), it cannot be serviced at all with cash from operations, which makes me uneasy. However, management has been able to reduce debt over the past five years, and it generates enough earnings to cover annual interest payments. Cash management is still not optimal and should be improved, but its overall debt level and interest coverage somewhat increases my conviction of the sustainability of the business going forward. CYAD has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. One reason I do like CYAD as a business is its low level of fixed assets on its balance sheet (4.24% of total assets). When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. CYAD has virtually no fixed assets, which minimizes its downside risk.

The current share price for CYAD is US$26.90. With 11.67 million shares, that’s a US$322.82M market cap, which is in-line with its peers based on its industry and adjusted for its asset level. Currently, it’s trading at a fair value, with a PB ratio of 4.88x vs. the industry average of 4.01x.

CYAD is a fast-fail research for me. Good companies should have good financials to match, which isn’t the case here. Given investors have limited time to analyze a universe of stocks, CYAD doesn’t make the cut for a deeper dive. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.