Omega Diagnostics (LSE: ODX) shares have been on a tear this year. Investors who were savvy enough to buy the stock in January have seen a total return of over 260% on their money. That’s vastly superior to the market-average return year-to-date.
Omega Diagnostics shares jump on good news
Omega Diagnostics shares have soared as the company has become a crucial part of the government’s coronavirus strategy. At the beginning of March, the firm became part of the UK Rapid Test Consortium (RTC).
Part of the government’s five-pillar national testing strategy, the RTC, which also counts Oxford University as a member, is working to develop and manufacture a Covid-19 point-of-care antibody test.
But this isn’t the only string to Omega’s bow. The company has also developed rapid testing for HIV and other viruses. At the end of April, the firm confirmed it had inked a material transfer agreement with diagnostic test producer Mologic. The two parties will now work on the development of Mologic’s Enzyme-Linked Immuno-Sorbent Assay diagnostics test.
These deals should help underpin Omega Diagnostics shares. Still, at this point, it’s difficult to place a value on the stock. While the company earned a small profit between 2014 and 2017, the firm reported a loss in 2018 and 2019.
However, analysts believe the company’s new agreements could help it earn revenues of up to £30m. This forecast is based on an assessment of the business’s testing production capacity.
As Omega reported just £9m of revenues for 2019, a jump to £30m could yield a significant increase in profits for the firm. Historically, Omega has reported an operating profit of around 5%.
On revenues of £30m, this suggests the business could earn somewhere in the region of £1.5m of operating income on this optimistic broker projection. By comparison, Omega Diagnostics shares are currently valuing the business at £84m.
As such, Omega Diagnostics shares look a bit expensive at current levels. Nevertheless, this is only a rough projection, and there’s no reason why the company can’t beat City expectations for the year.
Long term potential
As of yet, we don’t know how much of an impact on the RTC partnership will have on Omega’s profits. It could end up being a game-changing agreement, especially if it opens doors to produce additional tests for other markets. Considering the company’s experience in the testing market, and existing manufacturing capacity, this is a very real prospect.
In this most optimistic scenario, the stock may increase further from current levels, depending on the scope of the new contracts, and revenue potential.
Therefore, considering all of the above, Omega Diagnostics shares may have the potential to make you a fortune in the years ahead. However, this is a high-risk, high-reward investment.
It may only be suitable for the most tolerant investors and should be owned as part of a well-diversified portfolio.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.