Meridian Bioscience (VIVO) is a small cap health care company known for increasing its dividend rate for 19 consecutive years. That makes it appealing to dividend growth investors, and is often in the lists of companies with long streaks of increasing dividends, such as David Fish’s “Dividend Contenders” list.
Looking beyond the dividend, however, the attractive and impressive growth rates of sales, earnings, and dividends of the past decade appear to have slowed decisively. In my view, the stock price has not reflected this change in present results and outlook for the next few years. As such, I find it to be overvalued.
Meridian Bioscience’s main business is the development and manufacture of diagnostic test kits for certain gastrointestinal, viral, respiratory, and parasitic infectious diseases. Meridian’s largest product category is tests for the detection of Clostridium difficile. C. difficile infections typically occur in hospitals, nursing home, or similar facilities after treatment with broad-spectrum antibiotics. C. difficile normally competes with beneficial bacteria in the gut, but when antibiotics remove beneficial bacteria, C. difficile infections can result in bloating, abdominal pain, and diarrhea. Severe cases can lead to pseudomembranous colitis, a colon infection that can potentially be life-threatening. Typical treatment of less serious cases is to simply stop whatever antibacterial treatment the patient is on.
With such a simple treatment in most cases, a diagnostic test to identify the infection is immensely valuable. Meridian’s previous C. difficile diagnostic test uses antibody recognition of certain toxins produced by the C. difficile bacteria. Meridian’s main product development breakthrough in 2010 was the introduction of its illumigene molecular amplification test. Rather than test for the presence of toxins produced by the C. difficile bacteria, the illumigene test detects the DNA of the bacteria. This is a much more sensitive test – in theory, DNA amplification can detect the presence of even one molecule of DNA in the sample.
The illumigene molecular amplification assay currently only detects C. difficile infections, but development is underway to apply the same technology for the detection of other infections. Meridian has announced plans for an illumigene test for the detection of Group B streptococcus in prenatal patients. Untreated Group B Streptococcus in newborns can cause bacterial meningitis, a potentially lethal infection. Meridian is also conducting research to apply the illumigene technology to respiratory infection and foodborne disease.
Diagnostic test kits represented 81% of 2010 sales. Diagnostic kits for the detection of C. difficile were the best sellers in this group, but other products include kits for the detection of influenza, foodborne disease, and Helicobacter pylori. Meridian had significant sales from detection of kits to detect the H1N1 flu, but between the virus’s rapid disappearance and a decrease in detection kits sold for seasonal flu, sales in this segment fell rapidly and are expected to be less than 3% of sales in 2011.
This is down from 19% of sales in the first quarter of 2010. Sales in the foodborne category grew 30% in 2010, and the introduction of tests to detect Campylobacter in 2009 suggest continued strong growth in this segment in 2011.
In July 2010 Meridian acquired the Bioline group, a manufacturer and distributer of reagents for molecular biology research in academic, biotech, and pharmaceutical markets. Bioline’s 2010 revenues were about $12 million, and Meridian expects double digit growth in 2011 from this unit.
Although Meridian Bioscience had strong growth through 2009, its 2010 performance was disappointing. Sales fell 3.6%, operating income fell 16%, and earnings per share fell 19%. Earnings per share in 2010 were lower than Meridian earned in 2007. The last three quarters have had earnings disappointments of 6%, 17%, and 21%. Meridian Biosciences is missing earnings projections by significant amounts, and by an increasing amount in each of the last three quarters.
Meridian does have good growth prospects going forward – analysts surveyed by Zack’s estimate a long term growth rate of 16%, with 2011 earnings of $0.78 and 2012 earnings of $0.93 per share – of course, these are the analysts who were 6%, 17%, and 21% too optimistic over the last three quarters.
At a current stock price of $24, the trailing twelve months P/E is 39, and the P/E on estimated 2011 earnings is 30.8. This is simply too rich a price to pay for a company even if it can hits its projected long term growth rate of 16%.
Additionally, the current dividend is larger than earnings, and 2011 earnings must hit analyst targets for the dividends paid out in 2011 to be greater than earnings. This potentially puts even the attractive streak of dividend increases at risk. Even if the company can maintain this streak, dividend increases will almost certainly lower in the next few years as the company pushes the dividend payout ratio back towards its target of 75-85%.
Meridian Biosciences is a great company, and the management runs it the way I would run a business. It has good growth prospects, a good dividend yield, and a great record of dividend increases. But it is simply too expensive. I bought Meridian a year ago just under 20, and I was willing to pay a P/E of 25 at that point for future earnings and dividend growth of perhaps 20% a year. Meridian also paid a nice 3.8% dividend. At the current price of 24, with earnings nearly 20% lower than in 2009, the P/E of 39 (or 31 on estimated 2011 earnings) is unsustainably high.
After these considerations, I sold my shares; I recommend you do too.