AZTA - Azenta: A Second Assessment

2023-06-16 13:10:02 ET

Summary

• Today, we take our second look at a life sciences concern called Azenta, Inc.
• The company has a massive cash hoard, is buying back a huge amount of stock, but sales growth is slowing, and valuations appear stretched even after a recent pullback.
• An updated investment analysis around Azenta, Inc. follows in the paragraphs below.

To live is the rarest thing in the world. Most people exist, that is all. "? Oscar Wilde.

Today, we are circling back on Azenta, Inc. (AZTA). We concluded our initial article on this intriguing life sciences concern back in October of last year thusly:

The company has plenty of ammo to continue do additional 'bolt on' strategic acquisitions and at some point, this Covid nonsense will eventually end in China. Therefore, I am aligned with recent insider buying in the view AZTA is worthy of a small 'watch item' holding while the story around the company evolves ."

The stock is up slightly from that initial take. Given it has been some nine months since that initial look at AZTA, it is time to update the investment analysis around this name.

Company Overview:

This Boston-headquartered life sciences concern's product portfolio includes automated cold sample management systems for compound and biological sample storage; equipment for sample preparation and handling; consumables; and instruments that help customers in managing samples throughout their research discovery and development workflows. Azenta also provides various services to clients that include integrated cold chain solutions, informatics, and sample-based laboratory services to advance scientific research and support drug development.

The stock currently trades around $46.00 a share and sports an approximate market capitalization of just south of $3 billion.

The company has built a broad product portfolio via a series of " bolt-on" acquisitions over the years. The latest of which was of Ziath, Ltd., a leading provider of 2D barcode readers for life sciences applications. This transaction closed in early February and came with a cash purchase price of approximately $16 million.

Growth has come both organically as well as from these purchases. The result has been an impressive long-term rate of sales growth as you can see above.

The company had gotten nearly two thirds of its revenues from services to clients with the rest coming from product sales. With the purchase of B Medical Systems, which closed in the last quarter of 2022, that mix shifted more to Products.

First Quarter Results:

The company posted its first quarter numbers on May 9th. The company had a non-GAAP loss of six cents a share, four cents worse than the consensus. Revenues only rose slightly on a year-over-year basis to $148 million, nearly $14 million below the consensus. They were also down some 17% sequentially from the prior quarter. Concerningly, "organic" revenues fell eight percent on the year-over-year. The company was able to offset this via a 13% contribution from recent acquisitions. One of the few positives for the quarter was that storage systems revenue grew 6% year-over-year and has a strong backlog.

Services revenue declined 3% year-over-year which included a very small impact from falling sales related to Covid as the pandemic finally comes to an end. Gross margins fell this quarter to 35.9% from 48.1% in the same quarter a year ago and that was with total operating expense falling $9 million from 1Q2022 to $66 million.

Management also noted timing-related issues, most notably in B Medical for part of the less than stellar revenue numbers. In conjunction with its earnings release, leadership announced a corporate restructuring that largely consists of streamlining Azenta's manufacturing operations which should result in a reduction of annual operating costs by $15 million annually when complete.

Analyst Commentary & Balance Sheet:

Since first quarter results posted, Keybanc downgraded the shares to an Equal Weight from Overweight and Evercore ISI lowered its price target two bucks a share to $42 while maintaining its Neutral rating on the stock. Finally, Needham reissued its Buy rating but lowered its price target to $55 from $68 previously.

Just over nine percent of the outstanding float is currently held short. A company director sold just over $100,000 worth of shares last week. That has been the only insider activity in this stock so far in 2023. The company ended the quarter with approximately $1.5 billion in cash and marketable securities on its balance sheet . After recently completing a $500 million stock buyback program, the company just commenced an additional $500 million share repurchase authorization.

Verdict:

The current analyst firm consensus has Azenta, Inc. making six cents a share in FY2023 as revenues grow 16% to nearly $645 million. They project 17 cents a share in earnings in FY2024 on high single digit sales growth.

One of the biggest positive the company has is its massive balance sheet. However, I am not a fan of Azenta's huge buybacks. The company has little in the way of earnings yet, so bolstering EPS has minimal effect. The cash would be better spent continuing to do solid "bolt-on" acquisitions to build out is product portfolio. Barring that, three-month treasuries are paying five and a quarter percent which would generate approximately $80 million in returns on the company's $1.5 billion cash hoard.

Outside the balance sheet, it is hard to be too positive on Azenta, Inc. share given minimal earnings and slowing revenue growth. Equating for net cash, the stock sells for just over 2.3 times forward sales, not compelling given minimal profitability and mid-teen revenue growth this fiscal year that is projected to slow in FY2024. Therefore, I am passing on any investment recommendation on AZTA and have cashed out of my previous " watch item" position.

It is better to be hated for what you are than to be loved for what you are not ."? Andre Gide, Autumn Leaves

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