2023-09-07 07:54:42 ET
Summary
- Harvard Bioscience's Q2 earnings showed a slight miss on EPS and revenue, causing a decline in the stock price.
- The company is committed to improving its product portfolio and has observed increased traction from new products launched last year.
- Despite the earnings miss, Harvard Bioscience is still pulling in profit and experiencing growth, with updated guidance for 2023 showing expected revenue increase.
Harvard Bioscience (HBIO) had a robust start in 2023, but their Q2 earnings report revealed a slight miss on EPS and revenue. The company's quarterly revenue reached $28.8M, but that was a slight decline compared to last year when considering as-reported figures. As a result, the ticker has lost some momentum and has lost roughly 25% over the past three months. However, it's important to note that this year-over-year comparison includes a net effect of $1.6M from discontinued products compared to Q2 of 2022. Although this has hurt their earnings report, this transition shows that Harvard Bioscience is committed to improving and streamlining the company's product portfolio. Notably, the company is already observing increased traction from new products launched last year.
I believe the recent sell-off could provide an opportunity for me to reload on HBIO after the ticker hit my Sell Target 2 back in June of this year. Typically, I would be hesitant to restart my accumulation of shares of a ticker I just booked profits on, but the company's fundamentals and technical analysis of the chart have bolstered my conviction at my Buy Threshold. If all goes well, I should be reloading HBIO into another compounding cycle that will lead to a long-term investment.
I intend to provide a little background on Harvard Bioscience and will discuss my views about the impact of their Q2 earnings. Then, I will point out some positive trends and potential growth drivers that investors should keep an eye on during the coming quarters. In addition, I will point out some leading risks for HBIO that investors should consider when managing their position. Finally, I will lay out a plan for reloading HBIO.
Background on Harvard Bioscience
Harvard Bioscience is committed to the advancement, production, and dissemination of specialized technology, products, and services crucial for research and development, as well as pre-clinical assessment in the realm of drug development. Harvard Bioscience essentially operates within two distinct divisions: Cellular and Molecular Technologies "CMT" products, and Pre-Clinical products. The company distributes its offerings through its internal sales teams and external distributors, catering to a broad spectrum of clients within the healthcare industry, educational institutions, and hospitals, both domestically and internationally.
In the domain of Cellular and Molecular Technologies "CMT", Harvard Bioscience provides a range of tools essential for laboratory research involving tissues and organs, encompassing areas like gene therapy and small molecule studies. Their CMT product portfolio encompasses a diverse array of items, including peristaltic pumps, syringes, infusion systems, spectrophotometers, microplate readers, amino acid analyzers, gel electrophoresis apparatus, electroporation devices, and electrofusion instruments.
On the other hand, their Pre-Clinical product line is geared toward assisting in the analysis of laboratory data pertaining to drug research endeavors. These offerings encompass inhalation and telemetry products, complete with the requisite sensors, components, and accompanying software for conducting tests.
Q2 Financials
Harvard Bioscience disclosed that they pulled in $28.8M in revenues for Q2 of 2023, slightly down from the $29.2M in Q2 of 2022. However, the company pointed out that the Q2 revenues include a net reduction of $1.6M accredited to discontinued products that were attributed in Q2 of last year. Gross margin for Q2 improved to $16.7M, or about 58%, showing a slight increase from 57% in Q2 of last year.
Operating income for Q2 2023 amounted to $0.8M, down from $4M in Q2 of last year. However, the prior year's Q2 results counted in a favorable reversal of litigation reserves amounting to $4.9M. So, when we adjust for these items, Q2 2023 revenues reached $3.6M, compared to $3.1M in the prior year period. The company also announced their Q2 adjusted EBITDA for Q2 was $3.9M, up from $3.4M in Q2 of 2022. Additionally, cash provided by operations during the quarter added up to $3.6M, paying $3.2M in net debt.
So, it appears that some of the year-over-year drop in financial performance needed a slightly deeper dive than just going off the headlines. If you make all of the adjustments for one-off events, the company actually had a strong quarter.
In fact, the company has had a fairly strong first half with total revenues coming in at $58.7M , up slightly from the $58M reported in the same period a year ago when you remove the $2.8M from discontinued products compared to the first half of the previous year. Gross margin for the first half of 2023, improved to 59.6%, up from 56.6% in 1H of last year. Adjusted EBITDA for the first half of 2023 reached $8.7M, compared to $6.1M for 1H of 2022.
If we examine the quarter's revenue breakdown by product family figure below, we can see that cellular and molecular technology products decreased by ~12% and 3.6% when adjusted for currency and discontinued products.
Harvard Bioscience Q2 Revenue Breakdown (Harvard Bioscience)
Harvard's preclinical product revenue increased by roughly 10% and 11.5% when adjusted for currency and discontinued products. Asia saw strong growth, particularly in inhalation and respiratory products, while EMEA displayed robust growth throughout the product portfolio. Sales in the Americas saw a slight decline, mainly due to slower sales of inhalation and respiratory products. Overall, the company was down 1.5% as reported but up 3.9% when adjusted for currency and discontinued products.
What is more, the company's first-half performance and commercial trends encouraged them to update their 2023 guidance. Harvard Bioscience anticipates full-year 2023 revenues of approximately $116M to $120M, which would be at least a 3% increase from 2022. It is important to note, that this expected growth accounts for an approximate 4 percentage point headwind from discontinued products. Gross margins for the year 2023 are projected to be around 60%, with adjusted EBITDA margins in the range of 15% to 17%. Additionally, the company stated that they are committed to reducing their net leverage ratio to about 2X by the end of this year.
So, if you consider the company's Q2 and 1H earnings, as well as the guidance update, one must concede Harvard Bioscience is still pulling in profit and is experiencing growth. They might not be raking in profits and reporting double-digit growth, but the financials appear to be healthy enough to support the expected growth ahead.
Finding Growth
Over the past few years, Harvard Bioscience has been working hard to optimize their product offerings to target key technologies in the drug and therapy development continuum. The company strategy involves developing novel technologies and applications that can be employed in academic research labs while adapting them for broader commercial opportunities from pharma, CRO, and biotech.
To support this strategy, Harvard Bioscience announced that they have several new products and introductions slated for this year. They have two new product technologies ready for this year aimed at advanced cell-based testing. One of these is their new mesh array organoid MEA platform, which is adept at measuring signals from inside the organoid. The company's MEA technology is applicable to various areas, including small and large molecules, as well as cell and gene-based therapies. Initially targeted for neuro and cardiac applications, this technology has the prospective to replace some of the contemporary full-organ systems or animal models and help speed up drug testing processes.
The second is their second-gen multi-well MEA platform, intended for higher-volume MAA uses, which can be employed in industrial applications and expand their presence in CROs and BioPharma.
These product introductions signify an exciting phase for Harvard Bioscience as they target more of the higher volume industrial applications within the CRO and biopharma sectors.
Another growth opportunity comes from M&A activity, which is part of their growth strategy. The company expects to have an enhanced balance sheet by the end of the year, which will permit them to explore acquisition prospects that align with their current sales force and customer dealings.
What Level Of Growth Are We Looking At?
Well, the Street is expecting modest single-digit revenue growth for Harvard Bioscience for the next couple of years.
However, the Street is projecting the company is able to report solid double-digit EPS growth over the same time period.
Indeed, Harvard is not going to be reporting shocking EPS totals… but, that growth would be respectable and should have a positive impact on the share price.
Lingering Risks to Consider
In my previous HBIO article , I discussed how the company faces several significant downside risks that appear to have contributed to the downward pressure on its stock price and hindered a potential resurgence. Although the share price has recovered significantly since then, those risks still exist and will most likely keep a lid on the ticker until they are addressed. Firstly, the company's cash position is a cause for concern, as it holds only approximately $4.3M in cash and cash equivalents as of the end of Q2. Fortunately, Harvard Bioscience is not rapidly depleting its cash reserves, and this position may be sustainable for the foreseeable future. Nevertheless, investors should anticipate the market's cautious stance on HBIO until its financing situation is addressed.
Secondly, Harvard Bioscience lacks consistent profitability, with its earnings per share "EPS" exhibiting fluctuations. While the company is demonstrating growth and holds a promising long-term outlook, the market is likely to continue penalizing a stock that reports irregular earnings and EPS growth.
Furthermore, the company faces formidable competition from other life science research firms, such as Becton, Dickinson ( BDX ), Danaher Corporation ( DHR ), Bio-Rad Laboratories ( BIO ), Lonza Group (LZAGY), Revvity ( RVTY ), and Thermo Fisher Scientific ( TMO ). These companies are industry leaders capable of impeding Harvard Bioscience's expansion prospects and affecting its long-term outlook.
Taking these factors into account, I assign a conviction rating of 2 out of 5 to HBIO.
My Plan
Q2 earnings report showed a slight miss on EPS and revenue. Despite this, I am encouraged by the company's strong start to the year after last year's restructuring efforts after industry and economic headwinds, and I am looking ahead to the remainder of 2023 to see how their recent product launches are gaining traction. Again, although the earnings are not overly impressive, I believe Harvard Bioscience is in a much stronger position compared to just a year ago.
As I mentioned in my introduction, I was able to book some profits back in June, but my HBIO was laughably small. Now, I am holding a "House Money" position, but I am considering reloading my minuscule position in the near term. Unfortunately, my Buy Threshold is $2.12, which does not appear to be in the cards anytime soon if you look at the Daily Chart. I would like to take advantage of the market's unjustified sell-off, but I don't foresee HBIO dropping below $3 per share barring a market-wide sell-off.
HBIO Daily Chart Enhanced View
Considering this, I am moving my Buy Threshold up to my previous Sell Target 1. As a result, I have adjusted all of my Buy Targets as well as my Sell Targets.
After increasing my position, I'll strive to periodically augment it when I identify compelling reversal opportunities that align with my Buy Threshold. Conversely, I'll place sell orders at my Sell Targets to restore my position to a "House Money" status, intending to maintain it as a long-term investment.
I still anticipate holding onto my HBIO investment for a minimum of five years. My confidence is rooted in the belief that the company will sustain its position as a frontrunner in the life sciences and research instruments sector, leading to eventual market recognition of its worth. Alternatively, the company may be acquired at a favorable valuation during this period.
For further details see:
Harvard Bioscience: Looking To Reload After Post-Q2 Earnings Sell-Off