A Diagnostic Update On Trinity Biotech

Jun.22.12 | About: Trinity Biotech (TRIB)

Since the last time I wrote about Trinity Biotech (NASDAQ:TRIB), we've been rewarded with another good set of Q1 2012 results -- more good news flow, plus steady progress on the sales and earnings front. The "boys from Bray" really do continue to deliver. The shares have just gone ex-dividend, and an annual dividend of $0.15 per ADR will be paid today, June 22. This is small (a 1.3% dividend yield) vs. the share price and the company's current cash pile (about $3.60 per ADR), but the 50% year-over-year increase is a confident signal. TRIB also confirmed its intention to continue with open market share repurchases up to a maximum of about $25 million, around 10% of its current market cap. Here is the company's latest investor relations presentation.

I've now upgraded my Intrinsic Fair Value target slightly to $13.41. Based on M&A multiples in the industry (plus cash on the balance sheet), I'd now peg my secondary price target at a $16.69 Relative Fair Value.

What's interesting to see is that TRIB shares spent a full year oscillating around $9.75-$10. Since then, in the past two months it's established a new base in the $11-$11.75 trading range. Even more interesting, $11.75 represents a seven-year high for TRIB, and it broke that level on June 20. This move prompted me to trim my TRIB stake to 7.4% -- no bad reflection on the stock, just some top-slicing, and it remains my second largest portfolio holding.

TRIB continues to trade strongly (recently at $11.94). I like to see two consecutive closes above a key technical level for definitive confirmation of a breakout. Even if we see a (temporary) pullback, the overall price action already suggests a significant break higher is coming. I wouldn't underestimate the impact of TRIB leaving the $10 level in the dust either. This is pretty nutty from a European perspective, but in the U.S. huge swathes of investors and institutions won't follow or buy sub-$10 stocks. Now that the share price has hurdled clear of that level, I suspect TRIB is only now showing up on the radar of many potential buyers.

So, what's the next target? It's hard to say, given that higher technical levels are pretty stale at this point, so they may not prove so relevant or resistant. Presuming this breakout, a drive higher to somewhere between $13 and $15 seems entirely likely. This move would obviously reach/surpass my Intrinsic Fair Value target. As I've said before that would certainly prompt me to trim my position further, back to, say, a more average stake size within my portfolio.

What's fascinating about TRIB is that it's a medical devices/diagnostics business, and I track transactions in the sector. As a value investor, I just can't stretch my Intrinsic Fair Value much higher (at the moment), but I'm confident an acquirer would pay up substantially in a potential takeover situation -- which explains my secondary Relative Fair Value target of $16.69. Are they overpaying, or am I simply too short-sighted in my valuation process? Who knows? But what really excites me is that the market/investors periodically get wildly enthusiastic about medical device companies, bidding them up in a parabolic fashion. Take a look at TRIB's long-term chart:

Click to enlarge image.

Click to enlarge

For TRIB, this public market enthusiasm was expressed in terms of a buying frenzy every four years, which each time would drive the share price up from $10 to dizzying $25+ levels. 2008 broke that cycle, but no surprise there. But now it's 2012, another four years have gone by -- maybe it's time for another run?

Considering how much value investors get hurt buying (and selling) too early, trying to hang on to a significant portion of my TRIB stake (with some tight risk control) could really offer some decent payback.

Disclosure: I am long TRIB.