- BioLife Solutions has defensive characteristics that see it catch a bid over June/July.
- Much of this can be explained away as sector beta versus pure idiosyncratic risk premia, by estimation.
- Valuations are unsupportive of longer-term upside and our projections sit below consensus estimates that look optimistic.
Investment summary
In identifying asset allocation in H2 FY22 a systematic approach to selection has become increasingly important. With respect to BioLife Solutions, Inc ( BLFS ), we are neutral on the shares and believe the sell-side's consensus psychology that's baked into the share price is too optimistic. Findings show that valuations are unsupportive of longer-term upside. Although, BLFS has caught a bid in June/July, and both technical and market factors are supportive of this upside. Here we unpack the moving parts of the BLFS investment debate. Rate neutral.
Exhibit 1. BLFS 6-month price action
Image: HB Insights. Data: Updata Analytics
Bullish equity premia - market factors
Investors have wound back the risk budget to equities in FY22, resulting in large outflows across the year. Chief to this trend has been an unwinding of the liquidity driven trade over the past 2-years, that saw a rise in beta-driven strategies, where unprofitable names were rewarded at high multiples. In FY22 the situation has reversed. Low-beta, high quality strategies with value embedded into risk/reward calculus are agreeing most with investors this year. Hence, we are seeking names that exhibit a recent downshift in covariance to the benchmark.
BLFS exhibits these characteristics. It has gained in strength relative to the benchmark since May, seen in Exhibit 2. It continued to catch a bid into June/July, a key feature of the potential alpha on offer. Shortly after, BLFS equity beta began to shift downwards, validating the strengthening trend against the benchmark. This is essential to gauge in order to see where the stock sits in respect to the market.
Exhibit 2.
Data: Updata
Further evidence BLFS is converging to the upside is seen in the chart below, where we observe the stock strengthening against the medical devices and health care equipment sector. However, we need to understand how much of this is just sector beta, versus pure price alpha to separate from the stock. As seen in Exhibit 3, BLFS has lifted versus the sector although this could just be sector beta. Hence, for those investors seeking strategic exposure to healthcare versus individual stock-picking on the tactical side, BLFS offers potential upside capture on this level.
Exhibit 3. Strengthening against medical devices and health care equipment universe, although looks to be driven by sector beta.
For those investors seeking to gain exposure to healthcare on the strategic side as a defensive play, BLFS looks to offer value here.
Data: Updata
Fundamental factors differ from consensus
Consensus has BLFS to print $163 million at the top for FY22 and this to carry down to $1.9 million in EBITDA, per Refinitiv Eikon consensus data. It is also forecast to deliver a net loss of $34 million and EPS of -$0.80 for the year. As seen in Exhibit 3, consensus has BLFS to print substantial income growth into FY24, with a median FCF forecast of -$17 million for FY22.
Exhibit 4. Consensus (median) income forecasts are optimistic
Firstly, quarterly top-line growth has been a standout for the company, and it continues to recognize upsides in revenue and gross profit from its various segments, as seen in the chart below. This is important, although investors have shied away from rewarding top-line growth in FY22 in favor of bottom-line fundamentals.
Exhibit 5.
Data: HB Insights, BLFS SEC Filings
However, earnings trends over the past 6 quarters to date are unsupportive of consensus' level of projected growth, by our estimation. As seen in Exhibit 6, the company has realized a series of quarterly operating losses across the pandemic. It printed a FCF loss of -$14 million in Q1 FY22 and investors realize a -1.8% yield on this. It has averaged a -$1.9 million quarterly FCF conversion since FY15.
Exhibit 6.
Data: HB Insights, BLFS SEC Filings
The ongoing FCF loss wouldn't be an issue and in fact would be desirable if the company were generating a positive ROIC. Here we checked how much NOPAT BLFS generates from its invested capital (adjusting for uncapitalized expenses on the balance sheet). As seen on the chart below, BLFS hasn't exhibited a standout return on investment over the previous 3-years to date. In fact, it has generated a loss, and posted a ROI at its FY17 levels last quarter. With these points in mind, we aren't as optimistic as the consensus and believe the company could be at risk of missing the street's estimates. Hence, a key upside risk to our thesis is if the company does beat consensus and our FCF forecasts of -$20 million and -$3 million in FY22 and FY23 respectively.
Exhibit 7.
Data: HB Insights, BLFS SEC Filings
Valuation
Shares are trading at ~1.6x book value and 6.6x sales, a discount and substantial premium to the GICS industry median respectively. The question then becomes if each of these are warranted. Its repeated pattern of unprofitability is a steep ask to pay anything more than 1x book value or less, by estimation. As a cleaner measure of corporate value, it is also trading at 1.2x EV/book value, and hence we'd like to check for any opportunity for mispricing.
Exhibit 8. Multiples and comps
Data: HB Insights
As such, if we were to pay 1.2x EV/Book value, we would theoretically be paying $18, basically fair value. In fact, if looking at price alone, there's a value gap the downside of ~25%, as seen in the chart below. Hence, we believe the stock could be up to that amount overvalued, and therefore offers a lack of compelling value.
Exhibit 9.
Data: HB Insights Estimates
Technical factors
On the charts, price action is supportive of near-term upside. On the point and figure chart, prices have thrust up off lows in May and are now testing the first of many inner resistance lines. We have upside targets to $20.50, which corroborates our neutral stance.
Exhibit 10.
Image: HB Insights. Data: Updata
Shares have also punched up above cloud support and the lag line has joined. On balance volume has pushed north since may alongside the stock price and looks to offer some near-term upside capture. The below chart is supportive of further upside in the short-term by estimation and this must be factored into the debate as well.
Exhibit 11.
In short
Based on the culmination of factors discussed here, we rate BLFS neutral. Whilst we believe the distribution of possible outcomes for the stock is likely to be positive, we are below consensus in the trajectory of growth, and believe there could be more compelling opportunities available. In terms of the probability of our thesis pulling through, fundamental and valuation factors are supportive, whilst market, analyst sentiment and technical factors aren't.
The key upside risk to the thesis is if BLFS beats to the upside in its next earnings report. We believe the consensus psychology that's baked into the stock price is a little optimistic, and estimate a lower growth trajectory for the company. Nevertheless, we look forward to providing further coverage.
For further details see:
BioLife Solutions: Sell-Side Posture Overly Optimistic, Rate Neutral