PKI - PerkinElmer: Focusing Appealing

Summary

• PerkinElmer has sold a substantial business in recent times, in order to fully focus on life science and diagnostic activities.
• The deal looks a bit cheap but is likely okay in the long run.
• Valuations have come down, despite a resilient performance, creating a compelling risk-reward for the pro forma pure play.

Towards the end of February, I concluded that there was a solid diagnosis for PerkinElmer ( PKI ) as it has seen a real boom following the pandemic. The company has seen strong "organic" performance, as I saw no reason to alter that stance.

Some Background

PerkinElmer is, or better said was, a discovery and analytics business under a single roof, with revenues generated from life science, food, environment and industrial end markets. Products to think of include imaging, detection, chromatographs, atomic spectroscopy and others, combined generating $3 billion in sales in 2019, of course, ahead of the pandemic.

With shares trading at $100 ahead of the pandemic, while earnings came in around $4 per share, the company traded at a premium of 25 times multiple, as the business has seen an explosion in the diagnostics business following the outbreak of the pandemic.

With shares trading at $120 in March 2021, I become a shareholder as the company has seen very strong momentum throughout 2020 and was actively deploying the excess earnings reported in the meantime to add to the production portfolio through bolt-on dealmaking.

The company even announced a huge deal in July 2021, with the $5.25 billion purchase of BioLegend to add life science antibodies and reagents capabilities, unfortunately at a steep multiple of 14 times revenues of $380 million. With myself being a bit skeptical on the deal and shares having risen to $170 in a short period of time, I cut out of half my position, only to see shares trade in a $170-$200 range for the remainder of the year.

In February, the company posted fourth quarter revenues of $1.36 billion on which adjusted earnings of $2.56 per share were reported, including an $80 million quarterly revenue contribution from BioLegend. The company issued a 2022 guidance calling for sales at $4.4 billion, or north thereof, on which earnings are seen at $6.80-$7.00 per share. This outlook excluded a substantial pandemic "contribution" as this compares to an $8 billion revenue number in 2021 on which earnings over $11 per share were reported.

Believing realistic and non-Covid-19 earnings power has improved to $7 per share, the company traded at 26 times earnings, albeit that the company has taken on some $4.4 billion in debt with the BioLegend deal, a substantial amount. Despite the fact that the company was in a better position than July 2021, it was too early to add to my remaining long position at the time.

Re-Rating

After voicing a constructive yet cautious stance in February of this year, shares have gradually fallen to $133 at the moment of writing, down some 20% ever since, amidst tough market conditions as well.

In May, Perkin announced first quarter sales at $1.26 billion, down in the low-single digits compared to the year before, a decent result by all means with adjusted earnings of $2.41 per share looking quite solid, with net debt coming down to $4.2 billion. The company hiked the full year guidance to sales of around $4.6 billion at the midpoint of the guidance, seeing earnings around $7.30 per share.

In August, Perkin announced a substantial deal as it has reached a deal to sell its applied, food and enterprise service business to New Mountain Capital in a $2.45 billion deal, of which a $2.30 billion upfront cash component is part of the deal. Note that after-tax upfront cash proceeds are pegged at just $1.9 billion to thereby cut net debt to $2.5 billion.

The deal involves the sale of $1.3 billion in revenues, a substantial amount by all means, with EBITDA margins posted in the mid-teens, far lower than the overall margins posted by the business. Assuming 15% EBITDA margins, some $200 million in EBITDA will leave the door, as the multiples look fair, perhaps a bit cheap following tax leakage. The deal will furthermore sharpen the focus, with Perkin becoming a pure play on a life science and diagnostics company.

In August, Perkin posted second quarter sales of $1.23 billion on which adjusted earnings of $2.42 per share were posted, marking very strong results. The company hiked the midpoint of the sales guidance to $4.62 billion, yet sees earnings as high as $7.85 per share (at the midpoint). Note that debt has fallen to $44.1 billion, making that pro forma net debt will rapidly fall to the $2 billion mark following the latest deal.

Concluding Remark

The 126 million shares now value equity a nearly $17 billion, for a roughly $19 billion enterprise valuation. With some $200 million in EBITDA leaving the door following the latest divestment, while Perkin should be able to offset some $60 million in interest costs as well (3% on $2 billion), we see a pre-tax hit of $140 million ahead of minimal depreciation charges, or about a $100 million impact on the bottom line.

This could cut earnings by $0.80 per share, as pro forma earnings might come in around $7 per share following the divestment, while leverage is under control, with earnings multiples now having come down to 19 times.

That looks quite upbeat given the superior long-term growth profile of Perkin (as flattish growth is not based on adverse comparables with the pandemic). This looks cheap, given the modest leverage, as now feels the right time to warm up to PerkinElmer again, as I am adding to my position.

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