BIO - Bruker Corp.: My Top Ranked Holding In Laboratory Analytical Instruments

Summary

• Bruker offers a range of advantages over peers: profitability, value, growth, and more.
• As such, the company is well-positioned to provide strong returns in the future.
• This article will address recent developments, highlight the advantages, and discuss the opportunity.

Introduction

Bruker ( BRKR ) is a diversified, mature, and still innovative laboratory analytical instrument provider. The company has a pattern of profitability spanning back over 10 years, all while providing high levels of growth during a period of industry disruption. With the rise of genomics and other advanced cell and molecular technologies, new entrants such as 10x Genomics ( TXG ) and Illumina ( ILMN ) have attempted to disrupt legacy instrument makers such as Waters ( WAT ) and Mettler-Toledo ( MTD ).

The industry is quite divergent in terms of investment opportunity. Innovation vs leadership, or speculation vs value. As a result of my analysis, I believe Bruker stands in the middle and offers a low-risk, high-value investment in the lab instruments industry. With many recent additions to their platform through a range of acquisitions, I believe that the major issue of organic growth that plagues the industry is negated for the next few years. When combined with a fair valuation and profitability that allows for reinvestment, the outlook looks superb.

Diversified Innovation and Leadership

Bruker is a company that combines both innovative new analytics tools with classical ones, and integrates software analysis to improve both areas. With a range of acquisitions and mergers over the past 20 years, the company is now diversified and exhibits better fundamentals than alternatives. As management puts it :

We are a developer, manufacturer and distributor of high-performance scientific instruments and analytical and diagnostic solutions that enable our customers to explore life and materials at microscopic, molecular and cellular levels. Many of our products are used to detect, measure and visualize structural characteristics of chemical, biological and industrial material samples. Our products and solutions address the rapidly evolving needs of a diverse array of customers in life science research, pharmaceuticals, biotechnology, applied markets, cell biology, clinical research, microbiology, in-vitro diagnostics, nanotechnology and materials science research.

To meet these goals, the company has steadily advanced a wide range of tools and services. These can be separated into four main operating segments, each with their own unique focuses. The end markets do not stop at life sciences either, with other industries such as chemicals, materials, food safety, agriculture, forensics, environmental, industrials, semiconductors, and more, all being customers.

• Bruker BioSpin: Designs, manufacturers, and distributes specialty life sciences tools based on magnetic resonance ((NMR)), MRI, PET, SPECT, CT, and MPI technologies. Used to determine and visualize precise chemical and structural characteristics of a wide range of molecules. Includes the worlds' highest frequency commercial NMR machines . Growth in the mid-single digits.

• Bruker CALID: Segment related to mass spectrometry, and infrared/Raman spectroscopy. Also used with chromatography instruments for molecular and disease diagnostics (think PCR, etc). Growth in the low double digits, even with a decline in COVID PCR test revenues. Combined with BioSpin, these groups account for 60% of total revenues.

• Bruker Scientific Instruments & Nano (BSI Nano): Instruments related to X-ray technologies with a wide range of uses such as X-ray fluorescence spectroscopy, electron microscopes, nanometer resolution solution topography, and optical fluorescence microscopy. New platform, Canopy, supports the Omics industry (genomics, proteomics, etc). Growth in the high teens, and is ~28% of revenues.

• Bruker Energy & Supercon Technologies ((BEST)): Design, manufacture, and distribution of superconducting materials, mostly for use in MRI, NMR, fusion energy research, and " big science " (think particle accelerators). Growth upper teens%, but only ~10% of total revenues.

Due to the diverse nature of revenues, cyclicality should be less of an issue than with more specified companies. The company also has high exposure to health care, government, and academics, suggesting spending may be less cyclical even in recessionary markets. As like with industries, growth will be reliant on the continued advancement of their group technologies. Bruker tends to do this through internal R&D (such as the world's best commercial NMR machines) and M&A. As I will discuss in the comparison between sector companies, the balanced financial approach of a mix between organic and inorganic growth will probably pan out well over the coming years.

Competitive Industry Requires Internal and External Processes

When looking at this industry, one thing is certain: organic growth is fairly slow. This is due to the exposure to slower-moving academia, government, and pharma customers. However, innovation leads to small pockets of growth as companies look to capitalize on new industry trends. The current market has an intense focus on two areas: proteomics and cell biology. To gain access to this market, Bruker conducts both internal R&D and strategic M&A.

Through a series of small acquisitions over the past few years, the company's exposure to these growing industries has grown significantly. The combination and balance of conservative organic and inorganic growth is the key differentiator for Bruker at their current size. Smaller firms may have higher growth, or larger firms may be more diversified, but none offer a financially competitive balance like BRKR. Some recent deals are summarized as follows (also in the images below).

• Aquifer Imaging : Announced in Jan 2023, this deal helps expand BRKR's capabilities in machine learning-assisted imaging. By integrating with current imaging tool offerings, customers will gain access to high performance processing power to increase the accuracy and quality of images through big data.

• Biognosys : This deal moves Bruker deeper into the clinical research organization market, leading to higher margin service revenues. The integration involves the field of proteomics and includes developing software.

Financials

Despite only having a $10 billion market cap, Bruker is a globally diversified company with an approximate 32% NA, 33% EU, and 31% APAC revenue base. This leads to some issues with exchange rates for the moment as Bruker reports in USD. With this, Bruker's 10 year revenue growth rate average has fallen to 3.6%. However, due to recent developments, I believe a new growth trend is likely over the coming years. Although compared to peers, the growth rate is quite competitive, especially when considering earnings growth.

Bruker has a strong upward trend in margins over the past 20 years due to operational synergies. This has led earnings to grow faster than revenues. At the moment, BRKR's EBITDA margin and Net Income margin are more than double the 25 year mean. The linear trend does not look to be based on cyclicality and I believe that the revenue mix is to thanks. Therefore, I will look to BRKR to continue improving margins and allowing earnings to grow faster than revenues.

The key will be to manage spending in areas such as software and innovation that can be costly. Also, if revenue growth remains slow, it may be difficult for earnings momentum to hold the slack at current margins. It will be necessary for the organic/inorganic growth strategy to work in tandem with earnings growth, and the historical data suggests this can be possible (solid performance improvements from '08-'10 recession and margins were maintained from '10-16' despite slowing growth). For now, BRKR is well positioned for the years to come, but any changes must be considered accordingly.

One potential weak point to watch moving forward is the current debt load. Net debt has now risen to $520 million, although leverage remains ~1.0X. As long as profitability is maintained, this current debt level is low risk and I expect it will be reduced with time. Investors may also begin to expect buybacks, or at least no dilution, over the coming years. Free cash flow has typically been on a tight leash, but depending on how performance is, BRKR's future FCF growth may be a key component of investor success. Due to the success over the past 20 years, I feel management is capable and can maintain current momentum. It is not just my view, as UBS has recently established a Buy rating due to confidence in future growth.

Valuation Is Fair

While the current EV/EBITDA and P/S is above mean historical values, the valuation is currently fair. It is important to note the linear rise in profitability, diversification, and hopefully growth, and this supports a far higher valuation than in years past. Also, the shares have come down from overvaluation in 2021, with the P/E now trading around the 15 year mean thanks to higher margin.

In 2023, we could see the P/E fall below the mean as market weakness continues, or through a strong quarterly earnings. Either way, I would begin to add shares to capitalize on the low P/E, but be cognizant of the downside of the high EV/EBITDA due to leverage and P/S due to growth. As a long-term bet, I still believe Bruker will outperform, especially compared to the peer group.

Comparison With Peers

Along with clear qualitative and quantitative factors that suggest upside, Bruker also offers the best investment among their peer group. To determine this, I ranked 9 Instruments and Tools peers by a variety of financial metrics. The peers were as follows: PerkinElmer ( PKI ), Waters, Mettler-Toledo, Bio-Rad ( BIO ), Illumina, Agilent ( A ), Pacific Biosciences ( PACB ), and Harvard Bioscience ( HBIO ). The metrics rated included 10 year revenue and EBITDA growth rates, R&D Expense / Revenue, profitability, valuation, and leverage.

Through the ranking system, Bruker came out first. This is even when the focus on growth and valuation outweighed Bruker's clear advantages in profitability over peers. Although not ranking first in any metric, consistency is what makes BRKR successful. The ranks were close though, with three competitors within a point. Therefore, combining all the data still allows Bruker to be seen in a positive light. I would be glad to provide follow up on the rest of the rankings if readers are interested.

• 10-year Revenue CAGR (%): 3.66 - Rank 6

• 10-year EBITDA CAGR (%): 8.7 - Rank 3

• R&D / Revenues (%): 9.22 - Rank 5

• ROTC (10 year average %): 11.6 - Rank 3

• EV/EBITDA: 19.5x - Rank 3

• P/S: 4.05x - Rank 3

• N et Debt / EBITDA : 0.8x - Rank 3

Conclusion

With a balance between slower and faster growing laboratory instrument peers, high profitability, and a slew of recent acquisitions that may provide growth catalysts, Bruker looks like the best opportunity for the sector. The main risk point is the valuation, but I believe recurring investments will pan out well. The bet is not a trading opportunity, but rather a pillar asset for portfolio. I believe that accumulating now in 2023 will provide stable long-term returns from a volatile, but fruitful industry.

Thanks for reading.

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