Should I buy Novacyt shares at under 400p?
Novacyt (LSE: NCYT) shares are up nearly 10%, as I write. The Covid-19 testing specialist said its sales rose by 230% to 277.2m in 2020. Novacyts share price has risen by 60% over the last year, but the stock remains nearly 70% below Januarys high of 1,190p. The stock has slumped as the outlook for the business has become increasingly uncertain. The company is involved in a legal dispute with the NHS that relates to 45% of last years sales. Novacyt also faces a tougher market outlook, with demand for Covid-19 testing falling. 5G is here  and shares of this sleeping giant could be a great way for you to potentially profit! According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air And if you click here well show you something that could be key to unlocking 5Gs full potential...  A record-breaking year  Novacyt had an incredible year in 2020. The company generated a pre-tax profit of 132.4m on sales of 277.2m. This growth was driven by the companys role as one of the main suppliers of Covid-19 PCR testing kits to the Department for Health and Social Care. It was a profitable business  Novacyts operating profit margin hit 60% in 2020. The company was able to repay all of its debts and ended the year with net cash of 91.8m. Unfortunately, this strong performance has been spoilt by a messy dispute with the NHS . Bad news for shareholders  Investing in companies that are involved in legal disputes can be risky, as the eventual outcome is often unpredictable. Im worried about the potential impact of the NHS on Novacyt shares. The firms share price crashed in April when the company first revealed this problem. Details are scarce, but todays results did include an update on this situation. The 2020 revenue affected by the dispute is 129.1m. From what I can understand, the NHS is asking for a refund. However, Novacyt is hoping to be able to settle the case by replacing some products under warranty. The company reckons this might cost a maximum of 19.8m.  To make matters worse, this dispute is now affecting product sales in 2021. Novacyt says invoices for 49m of product delivered to the NHS this year remain unpaid. I dont like this situation at all. The only good thing I can see is that Novacyts 92m net cash balance gives the firm some breathing space. However, I suspect that much of this cash will be needed to resolve this legal claim. Novacyt shares rely on growth hopes  However, I can see two reasons to be optimistic about the outlook for Novacyt shares. Firstly, I think the stock may still be cheap. The latest management guidance is for sales of 100m in 2021, excluding the disputed NHS sales. CEO Graham Mullis expects to be able to maintain a gross profit margin of 70% on these sales. My sums suggest this values the stock at around 10 times 2021 forecast earnings. That seems reasonable to me. The other reason for optimism is that Novacyt is continuing to develop new non-Covid products for the respiratory, transplant and infection disease markets. Success here could help to offset a continued decline in Covid-19 testing. Personally, no. The combination of legal risks and the firms dependency on Covid-19 testing makes it too risky for me. Although the shares could recover well, I think a gradual decline is more likely.