2023-06-15 12:32:07 ET
Summary
- Despite interesting tailwinds in its biopreservation businesses, there are factors of risk with BioLife's growth outlook.
- Valuations are unsupportive and suggest BioLife could potentially be priced at a premium.
- Net-net, I reiterate BLFS stock a hold.
Summary of investment findings
Despite a 26% gain in the price for equity stock of BioLife Solutions, Inc. ( BLFS ) since the January publication, my latest findings indicate there may be no change to the original investment thesis.
On the one hand, you have a company growing in gross profit at an average 40% YoY over the past 4-quarters. This, backed by growth in core business metrics such as growth in new customer sites. On the other hand, none of this gross has pulled to the operating line, and the pace of top-line growth looks to be diminishing on my analysis.
As far as attracting investment, there is a lack of critical factors to suggest investors will start paying a higher value for the company. This report will examine each of these in detail, with additional insights. The outlook remains balanced in my view, supporting a neutral view. Net-net, reiterate hold.
Figure 1. BLFS 3x attempted breakout and fail
BLFS critical investment facts
1. Sub-par returns on acquisition capital
Despite an ascending top line and plenty of gross profit drawn on this, the company's performance has been weighed down by certain "drains and pulls" on liquidity. Chiefly, these relate to its Stirling ULT and Biogenic Systems Cryogenic Freezer companies, both acquisitions BLFS made to grow its operations.
This string of commentary from the CEO on the earnings call sums up the situation nicely, without much need for external viewpoints:
...we are actively exploring strategic alternatives for our Stirling ULT and Custom Biogenic Systems Cryogenic Freezer businesses, which could include out-licensing our proprietary IP, changing our go-to-market approach, and outright divesting these assets...
...[a]s you know, we had high expectations for the benefits of scale the acquisitions could bring to BioLife...
... [t]he capital intensity and a lower margin volatile sales cycle business has not been beneficial to our core growth rate and corporate profitability and has not placed us in the peer group where we belong."
Thoughtful analysis makes rational sense of what's happened. For one, acquisitions are among the most value-destructive strings managers can pull within their playbook when allocating capital. This is supported by findings from McKinsey (2017), who also note that new launching new products, and increasing capacity are more beneficial, in that order. It tells me one of a couple things. Either, 1) the company had no opportunities to invest and grow core operations, 2) it overpaid for these– goodwill of $224mm post acquisitions was booked, demonstrating that amount of wealth transfer from BLFS shareholders, or 3) the acquisitions weren't as potent growth driver as originally thought [often the case].
In any case, expanding the business has come at a large cost for BLFS in the recent years. I often say the term growth company is thrown around too loosely. If looking at top-line growth alone, you'd be impressed here. Just from FY'20–23' in the TTM alone, the company booked another $115mm in turnover, investing an additional $8.1mm. Two things to consider here. Depreciation is ~$15-$16mm per year, and the firm is investing around $15-$16mm in CapEx on a trailing basis. This tells me little capital is being diverted to growing the business organically, perhaps being saved for another acquisition.
In fact, management confirmed this on the call:
"Going forward, acquiring additional high-margin recurring revenue businesses still make strategic and economic sense and our learnings from these 2 deals will be applied in the future".
This should be factored in heavily. Consider the company's performance under the past 2-3 years under these acquisitions. Another $66.2mm in OpEx to maintain operations, on little investment, consuming $35mm in cash on the balance sheet. As of Q1 the firm had $54mm in cash and equivalents, with $36mm of this in equivalents to capture the benefit of short-term rates.
Table 1. BLFS comparative statistics
Data: Author, BLFS SEC Filings
The gross capital productivity on this has been equally as poor, generating just $0.125 for every $1 of the company's assets [Figure 2]. That means you're getting 12.5% gross return on assets with the company's current operating levels. Granted, a potential divestiture of asset holdings could reduce the asset load, and increase the gross profit differential. Still, when looking at gross profits scaled by operating assets, it tells me the company's productivity levels need an improvement– especially as this calculation considers tangible and intangible assets, and the goodwill booked from the acquisitions.
Figure 2.
Data: Author, BLFS SEC Filings
2. Financial results
Looking at the company's latest numbers , it booked revenue of $37.7mm for Q1 FY'23, 4% YoY gain. Excluding COVID-related income from the previous year, real revenue growth was 16%, primarily driven by a substantial 28% increase in biopreservation media revenue. It is getting about time to exclude Covid-related income in full going forward, so we'll be seeing this (hopefully).
Additional highlights taken from the quarter are by all means net positive:
- Expanded customer base–– It added 197 new unique customer sites across all 3 products and services platforms during the quarter. That is an avg. gain of c.150 new customer sites in the last 5 quarters, certifying a decent pipeline of early-stage users. This pipeline will play a crucial role in driving future growth for the company.
- The breakdown on this, is as follows:
- 9 new customer sites using biopreservation media
- 5 new ThawSTAR users
- 17 new evo Cold Chain end users
- 15 new Cryogenic Freezer and accessory customer sites
- 121 new Stirling ULT Freezer and accessory customer sites
- 22 new Biostorage customers
- 8 new Cell Processing customers using Sexton products.
- Clinical trial tailwinds. I wouldn't discount the potential revenue that will be booked from BLFS's involvement in clinical trials, clinical programs, and so on. The company's solutions will be used in at least 20 additional clinical trials for new cell and gene therapies into the near future. Management believe that BLFS" biopreservation media products and Sexton Cell processing tools have been used (or at least been planned to be used) in >630 and 140 customer clinical applications respectively.
- Moreover, BLFS estimates that each customer clinical application, if approved, could generate annual revenue ranging from $500,000–$2mm for each clinical indication across its biopreservation media and Sexton products. These figures provide insight into the revenue potential from BLFS's involvement in these programs. I'd advocate to watch each segment closely, with extra focus on the ability to generate another $2mm in annualized turnover.
On this point, the cryopreservation platform pulled a decent clip of $11.5mm, reflecting a 15% increase compared to last year. This growth can be attributed to the kind of demand for BLFS' biopreservation media products/services I mentioned above. As to the broad market, as more companies and researchers engage in cell and tissue preservation for various applications (and there are many, especially now with the advent of simulation-based discovery with artificial intelligence, or "AI"), biopreservation media solutions are becoming increasingly essential. This positions the company well, but it will need to do more to command a buy rating in my view.
Management also reaffirmed FY'23 guidance to $202mm at the upper end of range, exactly in line with my estimates of $190–$200mm. This would call for ~20-25% growth in revenue and similar to gross profit. However, I don't see this pulling to operating earnings at this point, creating a conflict to my investment criteria.
3. Technical factors
This section will be quite brief, letting the charts do the talking. They are shown in Figure 3, Figure 4, and Figure 5 respectively. I will just call them (3), (4), and (5) when referencing.
In chart (3) below, the price action of around 12-months is observed. Your chart starts at the left of the page, walking to the red trend line shown at right. Note, the backing-and-filling in BLFS' equity, with no convincing investors placing orders above or below this range.
So the recent rally of 4-5 weeks off April lows is less meaningful in that context. Second to that, the thrust in price, was not a buying thrust. It has been low-volume buying, challenging its ability to extend much further.
Figure 3. Price–volume divergence
Data: Updata
Looking to chart (4) below, it shows the weekly trend analysis over the same time. Note, the stock is trading flat into the cloud, with the lagging line in situ. Both have work to do in order to break above the cloud and warrant a bullish view. This supports a neutral rating for the time being.
Figure 4.
We also have downside targets on the point and figure studies to $21. These charts smooth out the intra-trend volatility, providing price visibility and mathematical formulae to set price targets from. They have provided great guidance to date. Hence, I am looking to $21 as a technical target based on chart (5).
Figure 5.
Data: Updata
Valuation and conclusion
The stock is being sold at 5-6x forward sales, which is around 20% premium to the sector. That, and you're paying 2.8x book value for no profitability, and no earnings power moving forward based on this analysis. Whilst the financial results are definitely a bullish factor, these are balanced by economic factors that affect the investment thesis. In my view therefore, 5-6x sales is too rich a premium. The 20-25% projected sales growth is something, but probably justifies a multiple more in-line with the sector.
At 6x my FY'23 sales estimates of $200mm, I get to $27.50 per share. This is in-line with the current market price and thus not really much of a differential to call it a buy in my view, because at 5x forward I'm getting to $23, bang on with market value. These findings support a neutral view.
All findings are supported quantitatively by the quant grading system , which adds a layer of confidence to all estimates and assumptions presented here.
Figure 6.
Data: Seeking Alpha
In short, the objective findings suggest there may be opportunity cost of allocating capital to BLFS equity stock at this stage. Fundamental, valuation and sentimental factors, as evidenced on technical studies, don't scream out to buy the company right now. It has some interesting works in the pipeline, especially in its biopreservation offerings, but in my informed opinion these don't overcome the greater challenges presented to the buyer of BLFS today. Net-net, reiterate hold.
For further details see:
BioLife: Similar Hurdles Remain, Despite Biopreservation Tailwinds