TECH - Bio-Techne: Quality Play Struggles But Looks More Compelling

2023-11-20 05:52:51 ET

Summary

• Bio-Techne's shares have fallen by a quarter since May, but the long-term thesis remains intact.
• The company has experienced low single-digit sales growth due to macro issues, but long-term potential is still present.
• Valuations have become more reasonable, making the shares more appealing, but caution is advised due to lackluster growth.

In May, I believed that shares of Bio-Techne ( TECH ) represented long-term quality, but it came at a price. The company has combined organic growth with sound M&A deals, and while multiples came down a bit in May, a 50 times earnings multiple still looked very rich, too rich in fact.

Since May shares have fallen by another quarter, reducing expectations, but this has come amidst continued stagnation in the actual business, with low single digit increases in sales being rather underwhelming, but explained by macro issues. Amidst all this, I think that the long term thesis remained intact, and that long term potential can be seen, provided that shares see a further pullback here.

About Bio-Techne

Bio-Techne is a collection of proven products consumables which over time has grown to a billion revenue base, the vast majority of which is generated from consumables, as well as instruments, services and royalties. Actual products to think of include proteins, antibodies, spatial biology, analytical instruments, molecular diagnostics, and others.

In fact, shares have more than tripled over the past decade, having grown from over $300 million in 2013 to over $1.1 billion in 2023, although that growth into other areas meant that historical operating margins in excess of 50% have fallen to levels in the thirties, with growth aided by dealmaking efforts and organic growth.

Adjusted for a four-for-one stock split in 2022, a share price in the mid-teens in 2013 rose to the $130s in the fall of 2021, having ten folded over a decade. What followed was a pullback to $82 per share in May when I last covered the shares.

2022 revenues rose 18% to $1.10 billion, after an already very strong 2021. GAAP operating profits were reported at $296 million, with GAAP earnings of $272 million coming in at $1.65 per share, amidst a rather flattish net cash position. This granted the company a 50 times earnings multiple, but the growth continued as Bio-Techne acquired a 20% ownership stake in Wilson Wolf in a $257 million deal, with an option to acquire the remainder of the business at a billion valuation.

Unlike the strong growth seen in the past, the company has only grown sales by some 2% in the first nine months of the year, amidst a flattish share count. This made a valuation nosebleed high at 12 times sales in May, as I pegged realistic earnings to $1.70 per share, for a rather demanding 50 times earnings multiple, despite the long term qualities.

Coming Down Further

Since May, shares of Bio-Techne have lost another quarter of their value, now down to $61 per share.

In August, Bio-Techne reported a 5% increase in fourth quarter sales for the fiscal year 2023 to $301 million, with reported sales for the year up 3% to $1.14 billion (although up 5% in constant currency terms). GAAP operating profits were up a percent to $299 million and amidst some other income, net earnings were reported at $285 million, equal to $1.76 per share.

Adjusted earnings per share came in at $1.99 per share, up two cents on the year before, with about a third of the reconciliation due to stock-based compensation expense, for a realistic earnings number around $1.80 per share.

In October, Bio-Techne reported a 3% increase in first quarter 2024 sales to $277 million, although that adjusted earnings fell four cents to $0.41 per share. Net debt jumped to about $300 million following the acquisition of Lunaphore this summer, still a very manageable amount given that EBITDA trends closer to $400 million per annum.

With a share count of 162 million shares, Bio-Techne is valued at $10 billion, still resulting in higher valuations of around 8 times sales and 33 times earnings, but frankly these valuations looks a lot more compelling compared to the past already. Of course, we find ourselves in a higher interest rate environment, which hurts any valuation as strong double-digit growth which investors had gotten used to has come down to a near complete standstill here.

What Now?

The near term growth standstill comes amidst de-stocking of inventory by OEMs in an inflationary and higher interest environment and weakness in China, all reasons which competitors have reported as well.

This hurts the near term growth, but the long term growth profile should remain intact, as valuations have gotten a lot more reasonable than they have been for quite a while. This means that shares are down to the levels essentially seen pre-pandemic already.

Amidst all this, I am appealed to the pullback seen in the share price, but at the same time recognize that growth remains lackluster, as has been the case for 2023 as well. Hence, I continue to take a wait-and-see approach here, looking for a nicer entry point in the lower fifties given the positioning and the current performance here. At those levels I would be willing to initiate a position in this long-term growth player, but for now I continue to approach the shares with caution.

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