Is Exact Sciences a Buy on the Dip?

Man in a suit wrestling with a downward sloping chart.

It isn't every day that you see a stock fall more than 20% following a quarterly report that most executives would be thrilled to deliver. Exact Sciences Corporation (NASDAQ: EXAS) reported a 78% year-to-year revenue gain in the second quarter, but the stock still took a pounding because its sole revenue generator failed to meet some lofty targets.

Cologuard test volumes are growing by leaps and bounds, and they have so much room to run that huge returns could be around the corner. Let's look at arguments for and against this stock to see if it's a buy at its recently knocked-down price.

Reasons to buy

Earlier this year, the American Cancer Society (ACS) lowered the age at which it recommends adults begin receiving regular colorectal cancer screenings from 50 to just 45 years old, and Cologuard is one of the tests the ACS suggests. Exact Sciences reported an average cost per test of $479, and with around 104 million eligible Americans out there, Cologuard's peak revenue potential is downright staggering.

During the three months ended June, the company completed 215,000 tests, which were 59% more than the company reported during the same period last year. Exact Sciences will probably complete close to 1 million tests this year, and that's still just a few percent of the total eligible population.

Surging revenue and test volumes aren't the only encouraging signs Exact Sciences has displayed lately. The company's gross profit margin rose 5.1% in the second quarter as higher volume drove down the cost of performing each test.

Reasons to be nervous

Despite the stock's recent haircut, Exact Sciences still sports a big $6.2 billion market cap, which will slide a lot further if it doesn't start making strides toward profitability. The cost of manufacturing and completing each Cologuard test has fallen, but overall operating expenses haven't. As a result, the company reported a slightly wider loss during the three months ended June than during the same period last year.

Missing Wall Street's quarterly revenue estimates isn't necessarily something to get bent out of shape about, but investors should know that the company also failed to meet its own test volume expectations in the second quarter. More than halfway through the three-month period, management predicted between 220,000 and 230,000 completed tests and then missed the lower end of its target range by 5,000 tests.

While I'd say the Cologuard launch has been successful so far , it's way too early to pop champagne corks. That's why it was disturbing to see five executives at Exact Sciences earn a combined $34.1 million last year, mostly in the form of stock options that diminish shareholders' slice of any potential profits down the line. By comparison, Myriad Genetics , which generates significant profits performing diagnostic services, paid its top five executives a combined $12.9 million last year.

Exact Sciences finished June with a whopping $1.2 billion in cash and marketable securities on its balance sheet, but the clock's ticking on a $690 million debt that matures in 2024. Exact Sciences is a $6.2 billion company today, but if it doesn't get close to making ends meet by the end of the year, investors buying the stock on the recent dip could still suffer heavy losses.

What to look for

Guidelines recommend Cologuard testing every three years, and this stock isn't going anywhere if a significant percentage of people who completed a test in 2015 don't do another one this year. Around 36,000 patients completed tests through the first half of 2015, but management hasn't been forthcoming with three-year rescreening figures yet, which is troubling. Over the past few years, Exact Sciences has proven itself more than capable of sharing good news related to the Cologuard launch. If rescreening rates were going well so far, we probably would have heard about it already.

During the second-quarter earnings call, management sidestepped three-year rescreening rate questions by reminding analysts that roughly two-thirds of tests in 2015 were ordered during the back half of that year. Exact Sciences won't be able to avoid questions about rescreening rates any longer, and investors would probably be better off waiting until it has the answers they want to hear before risking their hard-earned money.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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