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by Dan Myers

Myriad Genetics (NASDAQ:MYGN)

Editor Rating $48 FV

  • Under Valued
  • Low Risk
  • High Growth
  • Well Managed
  • Strong Health
  • Strong Moat

Review Summary:

Strong play in a growing industry with positive trends. Sound fundamentals and a high short interest could mean an immediate pop in the stock.

Parkinson's disease. Colon cancer. Diabetes. These three human diseases are just a few examples where it is caused, or at least assisted, by the person's DNA. You can't fight your genes. However, if you know about the diseases you are predisposed to, you can take action to lower your risk.

Building the Case for Myriad Genetics

Myriad Genetics is one of several companies that provide this intelligence to patients. Here's how the company explains itself.

Myriad Genetics is a leading molecular diagnostic company dedicated to making a difference in patient's lives through the discovery and commercialization of transformative tests to assess a person's risk of developing disease, guide treatment decisions and assess risk of disease progression and recurrence.

In English, they provide testing processes that help people to know what diseases they are at risk of contracting. There is huge value in this process. If you know where and what the risks are, it's easier to avoid.

It reminds me of what Benjamin Franklin said: "An ounce of prevention is worth a pound of cure". By taking preventative action, it will reduce medical expenses for patients and hospital in the long run.

Are There Growth Possibilities?

The human genome is made up of 3 billion base pairs. Combinations of these base pairs can change the expression of any one gene. If there is just one change, you can see how the combinations will grow exponentially. There may be more combinations to research than there are atoms in the universe. This is an industry that won't die and growth will always be there.

5 Reasons Why I Purchased MYGN

There are many companies that do similar research but I have 5 big reasons to like MYGN.

  1. Revenue is 13x larger than it was 10 years ago. The growth has been steady and stable.
  2. Gross Margins are fat and steady. Very little additional cost once tests are developed.
  3. No debt. I love companies with no debt. I even wrote a 2 part series showing you the performance of companies based on the debt levels.
  4. Short Interest is high.
  5. Most assets are liquid.

Let me go through what numbers I can with the OSV stock analysis tool.

#1 Huge Revenue Growth and #2 Juicy Gross Margins


(click to enlarge)

MYGN Stellar Revenue Growth and Gross Margins

As you can see, revenue growth has been very strong year over year and since 2004, the Compounded Average Growth Rate is a phenomenal 26.3%. This is a result of a growing demand for such testing and an increase in the product offerings.

Here's a better look at the margins too.

MYGN Gross Margins Chart

MYGN Gross Margins Chart

But, the business model is rather odd in one way. Gross Margins are very high which is fine, but Capital Expenditure is also very low.

(click to enlarge)

MYGN has Low Capital Expenditures

The reason why this is odd is because to obtain efficiency in gross margin, a lot of companies invest in capital. Think of a ditch digging business. You can make use of labor to dig ditches which will lower gross margins, or you can buy a backhoe which is a capital expenditure. Myriad has neither.

No Debt is an Awesome Sign

If you've read my posts, you know that I am a big fan of debt free companies. This is no exception.

(click to enlarge)

MYGN No Debt Company

There is no risk of bankruptcy with MYGN. There is nothing to bankrupt. It also means that the cash flows from this growing, high margin operation is going to the shareholders and not to the banks.

High Short Interest Levels is a Contrarian Signal

I am not a fan of technical investing. But one metric I do find value in is short interest. The higher the short interest, the more pessimism built into the price of the company.

A big part of value investing is finding companies when there is blood in the streets. A high short interest means there is blood. Looking at Yahoo! Finance and the NASDAQ website, you get the following:

MYGN Yahoo Short Interest

Yahoo showing Shares Short and Short Interest

Yahoo is showing 57% of the float is short. That is a lot of shares to have to buy back. Plus, it's going to take over 2 weeks of buying to get the short interest back to normal. That is a lot of pent up demand.

If the company isn't performing, then the short interest doesn't matter. The company is going to tank fundamentally anyways. However, with a company like MYGN, the company is growing, margins are high and there is no debt to cover. This is a recipe for a short squeeze if I've ever seen one.

MYGN Detailed Short Interest Activity

MYGN Detailed Short Interest Activity

The Benefit of Having Liquid Assets

In addition to not having debt, MYGN has most of its assets tied up as Current Assets.

(click to enlarge)

MYGN Current Assets is 60% of Total Assets

Having more Current Assets provides flexibility for MYGN. This also supports the short squeeze possibility.

If you read my post on Accenture (NYSE:ACN) and how share buybacks create a floor to the stock price, MYGN has also been buying back shares. This will eventually force the shorts to cover and then the squeeze is on. If the shorts continue to fight and push the shares down further, MYGN will end up buying it back at cheaper prices.

But keep in mind that fighting a high short interest only works if you

  1. believe in the company's business model and the industry
  2. it has the financial muscle to fight

Myriad Genetics does.

Invert, always Invert! Consider the Risks

I see 3 main risks to the MYGN business.

  1. Obamacare lowers reimbursements on tests
  2. Patents expire or are not adequately protected
  3. Cheaper tests come on the market

Any of these 3 issues will hurt the revenue stream of the company. But I do believe that health insurance providers will encourage more genetic testing because it will lower the long term medical costs they have to pay out. Patents will expire and other companies will fight the patent wars. However, with so many genetic sequences to test, the supply of possible tests is going to increase.

Another positive sign is that MYGN has started to acquire competitors. Basically, acquisitions are complimenting internal R&D. Or what about the possibility that the testing could become so commoditized that you can get tests at Walgreens as easily as a pregnancy test? It's possible, but I do not see this happening any time soon. Testing is very involved, requires taking blood samples and other bodily samples. You can't do that properly at home.

Even if this was to come true one day, the market growth will outpace the drop in prices.

The Final Conclusion

I see MYGN as a strong play in a growing industry. The macroeconomics of the industry indicates a positive trend. I see more genetic testing in the future, not less. MYGN has very sound fundamentals and a high short interest could mean an immediate pop in the stock.

Pros

  • Awesome growth
  • Fat and Juicy margins
  • Financially safe

Cons

  • Obamacare rules can hurt revenues
  • Patents can expire
  • Services become commoditized

Disclosure: Author is long MYGN

Source: Why I Bought Myriad Genetics