AZTA - Azenta: Life Science Play Suffers A Bad Diagnosis

2023-11-09 15:07:28 ET

Summary

• Azenta, Inc., formerly Brooks Automation, sold its semiconductor business and subsequently became a pure play life science business.
• Azenta's shares have declined significantly and its valuation is still supported by net cash holdings.
• However, Azenta is not profitable, making it difficult to be optimistic about its shares.

In November 2021, I concluded that Brooks Automation has seen a huge year which included many moving parts. The company had seen strong operating momentum at the time and sold its semiconductor business at a price which felt a little soft, leaving the remaining life science business which is now known as Azenta, Inc. ( AZTA ) to trade at a too-rich multiple in my view.

The sale of the semiconductor business created a pure play life science business which looks interesting, certainly interesting today as shares have come down a long way and a lot of the value is still backed up by net cash holdings. However, the issue is that Azenta simply is not profitable, which makes it hard to get very upbeat on its shares here.

Some Perspective

During the pandemic year 2020, Brooks Automation was a billion business which was split pretty evenly between semiconductor activities and life science activities. A $70 stock, which saw earnings power around $2 per share, traded at high valuations of around 35 times earnings.

The company reached a $3.0 billion deal with Thomas H. Lee Partners in September 2021 to sell the Semiconductors Solutions Groups, triggering a rally in the shares which topped the $100 mark, even peaking around $120 per share.

The remaining life science business posted a 27% increase in fourth quarter sales to $137 million, with full year sales up 32% to $514 million. The fourth quarter earnings number of $0.29 per share included a partial contribution from the semiconductor business, as well as costs related to the sale, as the life science business posted earnings of just $0.12 per share for the quarter and $0.48 per share for the entire year 2021.

The 75 million shares granted the company an $8.8 billion valuation at the time, but this included about $3.2 billion in net cash (based on existing net cash holdings and proceeds from the life science activities), although that number might fall following transaction costs and/or tax leakage.

With earnings power of the business trending at just half a dollar, the resulting >100 times earnings multiple looked very expensive, making it easy to not be involved with the shares.

Coming Down

Since 2021, shares of Azenta have rapidly fallen to the $50 mark by fall 2022, as shares have largely traded around those levels in the remainder of 2022 and this year.

Forwarding to November 2022, Azenta (the company obtained this name after it announced the sale of the semiconductor business) posted its fiscal 2022 results. Revenues rose by 8% to $555 million, but adjusted for pandemic related impacts, sales were up 17% for the year. That was about the good news, as adjusted earnings rose just three pennies to $0.51 per share, although the stock-based compensation charges were already excluded in this.

Fourth quarter adjusted earnings per share rose four pennies to $0.16 per share as the company ended the year with $2.3 billion in cash and equivalents, a huge number as there were 75 million shares outstanding, with these cash holdings still resulting from the sale of the semiconductor business.

Part of these cash holdings were already depleted on some acquisitions. In June 2022, Azenta acquired German-based Barkey Holding in an EUR 80 million deal, with the business set to add $17 million in annual revenues. In August 2022, the company acquired B Medical Systems S.a.r.l, a medical temperature controlled transportation company. The company paid EUR 410 million for the Luxembourg-based business, adding EUR 109 million in sales.

Taking advantage of the declining share price by the fall of 2022, the company announced a half a billion share buyback program.

2023 - Stagnant

In February of this year, Azenta posted a 28% increase in first quarter sales to $178 million, as adjusted earnings per share were flat at $0.12 per share. In May, Azenta posted second quarter sales up just 2% to $148 million as the company actually posted an adjusted loss of six cents per share, comparing to a twelve cent profit per share in the year before as the company announced a restructuring program to regain profitability.

By August, Azenta posted a 25% increase in third quarter sales to $166 million as non-GAAP earnings of $0.13 per share were up a penny on the year before. The picture was and remains mixed. After all, fourth quarter sales are seen up to $155-$173 million, with adjusted earnings seen at just two pennies, plus or minus four cents. This is very disappointing, certainly as the business receives some net interest income at this point in time.

With 63 million shares trading at $48 the market value of the firm stands at just $3.0 billion here, and this still includes a net cash position of $1.3 billion, equal to about $20 per share. This means that the core business is valued around $28 per share, which values the life science business at around $1.8 billion. With full-year sales seen over $650 million this year, the activities are valued at less than 3 times sales here if we adjust for net cash, but unfortunately the business is not making any profits, in fact the contrary.

What Now?

The reality is that we find ourselves in a tough and somewhat strange situation. Despite the falling net cash holdings, net cash still makes up a substantial portion of the valuation of Azenta here. While the company now is receiving net interest income on these cash balances , they are coming down as the company continues to buy back shares, but the issue is that their own business is not profitable, resulting in continued losses.

On the other hand, Azenta, Inc. stock trades at just 3 times sales, which looks low, but the business has not been performing up to standards, of course, in fact the contrary. Given all this, I am intrigued by the situation but cautious at the same time, as there are few green shoots on the operating performance of the business.

Given all this, I am happy to keep a close eye on the shares and place them on my watch list, but I simply do not see the need to get actively involved with Azenta, Inc. stock here.

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