TECH - Bio-Techne Corporation: Not Paying The Premium Right Now

2023-08-22 04:17:02 ET

Summary

• Bio-Techne Corporation's share price has declined by over 10% in the past year, and its valuation is high at over 40x earnings.
• The company has acquired Lunaphore to drive growth in spatial biology solutions and maintain a leading market position.
• While Bio-Techne has strong profitability and diversified revenue sources, its high valuation and recent growth performance raise concerns for investors.

Investment Rundown

The share price for Bio-Techne Corporation ( TECH ) has been rather lackluster the last couple of months on a 12-month basis they are down by over 10%. The company is focusing these days on growing through acquisitions and maintaining a sound balance sheet in the meantime. Creating new revenue streams like this is not something new and not something that should be a cause for concern in my opinion.

However, despite the growth being very strong over the last 5 years, with the top line for example growing over 13% annually I don’t think the valuation does investors any good right now. Paying over 40x earnings is too high to call this value investing, bottom line growth needs to be far higher than it currently is to make it reasonable by any stretch. I like the quality of the company though and will at least be rating it a hold for now.

Bio-Techne Company News

In recent news, we got the announcement that TECH is acquiring Lunaphore and has also managed to complete it. As mentioned earlier, the company right now is focusing on driving growth through these measures. With a cash position of $180 million currently, I think TECH remains able to continue acquisitions. With FCF margins of nearly 18% as well the company is in a place where it can quickly replenish the cash position if they so wish.

In terms of what Lunaphore is as a company, they focus mainly on developing fully automated spatial biology solutions. The acquisition aimed to also boost the market position that TECH has in spatial biology solutions and maintain a leading position for both transitional and clinical research.

The instrument portfolio from Lunaphore includes COMET which is an end-to-end spatial biology platform with tissue staining and image preprocessing steps fully integrated in a fully automated system.

From the previous earnings call, there were some comments made regarding this acquisition and the potential it brings to revenue growth for the business. CEO Chuck Kummeth said the following, “This acquisition strengthens our spatial biology franchise while adding a talented group of innovators to the company. Our strong track record of identifying state-of-the-art platforms and technologies on the cusp of significant market uptake in growth like Lunaphore has been a key driver of our double-digit revenue in total stock return CAGR over the last 10 years”.

Seeing the impact of the acquisitions won't be visible until either the Q1 or Q2 FY2024 results come out, it depends on how fast TECH is on integrating them into their own business. I wouldn't expect them to be fully integrated until the early parts of 2024 and not until then should we be judging too harshly the results of the acquisition.

The company has been rather successful in diversifying its operations and not fully relying on one single source of revenue. The Pharma/biotech makes up around 48% of revenues and the remaining part is quite equally divided among distributors, OEM, and Academia. With an aim at geographic expansion, I think we will see TECH develop into an even stronger market leader in its industries and deliver a decent return over the long term for investors. That might sound bullish, but it's more aimed at investors already in the company. Those that are looking to buy should consider waiting to get a better margin of safety and cement returns.

Looking at the last report for example the growth has not been as strong as historically for the topline as it only grew by 5% YoY to $301 million for the quarter. One segment that did perform very well though was Diagnostics and Genomics, which grew by 10% organically YoY. Hopefully, this can be harnessed and expanded upon and be a leading revenue driver for TECH going forward. The fastest growth is still seen in smaller parts of the business but isn't unfortunately making enough of an impact on the top line to make the TTM p/s of nearly 10 reasonable. The ExoDx prostate test for example grew revenues by 92% YoY.

Profitability Of The Business

Margins remain very good for the company and with FCF of nearly 18% I think dividends are likely to be increased in the coming years and hopefully, the dilution of shares the company is doing will cease as well. I don’t see it as necessary when the margins are looking this good honestly.

The impact higher interest rates are having on the sector doesn't seem noticeable in TECH right now. The net margins are at their highest in the last 5 years and even if they continue to consolidate I think they are in a very good spot.

Valuation Model

Paying a premium is often necessary when looking at growing companies, but paying nearly 10x the intrinsic value is too much. However much the company might be able to grow, I don’t think there is any reason to pay such a premium right now. The share price would have to stand still for a long time until it looks appealing. With a terminal 8% FCF growth rate the company still doesn't reach anywhere near where I would be willing to buy. An intrinsic value is multiple of 3 - 4 might be justified if growth can be kept up.

Risks

Taking into account its earnings potential, the valuation of Bio-Techne Corporation has undergone a slight reduction from the 80-100 times earnings multiple observed in 2021, yet it remains quite high at around 40x earnings that reflect a slightly more realistic perspective. Despite the solid quality that is TECH business, its robust margins, and promising long-term prospects, recent growth performance has raised concerns. Paying a high premium like this should include stronger growth if one were to make a buy case for them.

The company's valuation seems overextended when compared to its current growth trajectory. The high valuation implies significant expectations for future earnings expansion that might not be fully supported by the recent growth trends. If the company's growth trajectory does not align with these high expectations, investors could face a situation where the stock's valuation becomes increasingly disconnected from its fundamental performance. Looking at the chart above here for example we can see that despite the EPS growth, the market has turned sour on the share price and let the premium slide over the last few years. I think this trend will continue and investors who want to buy should remain cautious and patient and expect better entry points in the coming 12 months.

Final Words

TECH has during its many years of operations grown very well but sits in a very overvalued place right now, unfortunately. In comparison to a peer like Bio-Rad Laboratories, Inc. ( BIO ), for example. This company has solid margins but trades at a discount to TECH with a p/e of under 30 currently. The company also has a decent p/b multiple of around 1.3 currently as well, which further highlights its valuation discrepancy to TECH. The company lacks an appealing price to start a position at and this is what ultimately leads me to rate them a hold instead of a buy.

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