Dionex Corporation: Quality at a Discount

Dionex Corporation (DNEX), at yesterday's closing price of 44.85, is a good opportunity to buy a quality stock in the Scientific Instruments field at a discount to its usual multiples. From their corporate profile:

Dionex is a leading developer and manufacturer of laboratory and process analytical systems and related products used to isolate, identify, and quantify the components of complex chemical mixtures. Dionex products are used extensively in environmental analysis, and by the pharmaceutical, life sciences, biotechnology, chemical, petrochemical, power generation, food and beverage, and electronics industries. These products are used to meet analytical needs ranging from basic research to in-process quality control. Dionex customers include many of the largest industrial companies worldwide, as well as government agencies, research institutions, and universities.

At a TTM P/E of 14.6 on EPS of 3.04, share prices do not reflect the steady history of growth and profitability, which can be expected to continue over the next several years. Projecting EPS of 3.68 when the global economy picks up, and a P/E of 17, my target price would be 63 within two years.

History of Profitable Growth:

The fiscal year ends 6/30, so the 2009 estimate shown consists of two quarters actual, one quarter company guidance, and one quarter extrapolated.

R&D – Dionex holds R&D expense steady in a range from 7 to 8% of revenues. The money appears to be well spent, as it has driven steady growth for the past five years. In contrast to the situation in pharmaceuticals, where large R&D expenses do not necessarily produce the hoped for next big drug, in this case R&D produces a steady flow of new applications and product improvements. I regard 7% as more or less an optimal ratio – too much higher does not seem to produce more results, less sometimes means falling behind the competition.

Future Growth Potential – Dionex' products will be see increasing demand: concerns for water purity, food contamination, and so on will increase as industrial development proceeds globally. Here is a link to a company description of their markets and products. With multiple product applications and doing business globally, this company should be resistant to recession.

Here are some excerpts from the latest conference call:

First, I’ll talk about Asia-Pacific cover. Asia-Pacific region continued to show a strong growth again this quarter. Our subsidiaries in China, Australia, Singapore and India represented the fastest growing countries during the quarter and have become a strong base of growth in our Asia-Pacific region.

The Asia-Pacific region continues to grow at a fast pace. And we view this region as a key growth driver in the future.

Let me talk about the pipeline. Our product pipeline is in very good shape and we are in a position to introduce additional new products in the second half of this fiscal year.

In the second quarter, already, we introduced Integral, our new process analytic system based on both IC and HPLC modules.

In addition to new products introduced in the second half of the last fiscal year are getting good market reception and are starting to gain traction. We anticipate that they will increasingly contribute to our sales in the third quarter and the rest of this fiscal year

More on sales:

Allow me to give you two nice examples. Our last pharma global pharma account have ordered us with Chromeleon software order for the pharma research and development operations in Europe, the US and China.

The total of over 650 Chromeleon licenses ordered as for the other approximately 1200 licenses already installed at these customers in R&D in production. The order was won against strong competition.

The National Police Academy of Japan ordered more than 50 UltiMate 3000 HPLC systems going to be installed in the provincial police station laboratories as LC/MS system in combination with third party MS instruments.

The order was won against strong competition and represents a nice reference for Dionex as it follows other successful IC based projects which we have realized for the police academy in the last 10 to 15 years.

Investment Strategy – the steady history of growth and profitability lends itself to a 5 year average EPS approach. An analysis along those lines suggests a mid-point value of around 70 per share, consistent with what I got projecting forward earnings and P/E. So, investment strategy here would consist of accumulating and holding for a price from 60 to 70 per share. As always, it is important to review quarterly earnings and conference calls to be sure that the company is performing as expected.

Disclosure: Author holds a long position in DNEX

Comments

[Howard Foster:]

A similar stock to check out is Bio-Rad Laboratories (BIO)

Mar 19 09:28 AM

[texalope:]

Hi Tom. I just read your recent article on MBIA. How has your trading strategy worked out this month.

Mar 20 12:35 PM

[Tom Armistead:]

MBIA was up over 5.00 Thursday, I had the opportunity to sell my March 5.00 calls at a profit, did not do so, now it's down around 4.00, my calls are worthless. I bought back the Mar 5.00 puts at a profit, so the cost of the whole adventure was manageable. The April positions are still showng a profit.

I am wondering if MBIA will go down under 4.00, if it does that will make it easier to establish the May position or roll April out to May.







On Mar 20 12:35 PM texalope wrote:

> Hi Tom. I just read your recent article on MBIA. How has your trading
> strategy worked out this month.

Mar 20 02:20 PM