Brooks Automation Offers A Two-For-One With Exposure To 2 Healthy Growth Markets
Summary
- Brooks Automation is posting impressive growth, driven by healthy demand for leading-edge semiconductor production tools, bio-sample storage, genomics, and DNA/gene synthesis.
- The semiconductor business will always be cyclical, but underlying long-term demand for leading-edge nodes looks healthy.
- Sample storage is a reliable, cash-generating business with decent growth potential, but next-gen sequencing and DNA/gene synthesis for discovery and manufacturing is a more exciting opportunity.
- Brooks shares are not conventionally cheap, but do not appear overpriced relative to the strong underlying growth and margin leverage opportunities.
I don’t know how much longer Brooks Automation (BRKS) will operate as is, what with the Street preferring more pure-plays these days, but for the time being this is an interesting way for investors to pursue exposure to two attractive growth markets – leading-edge semiconductor manufacturing and life sciences, with an attractive “kicker” to gene therapy in the latter.
Not surprisingly, Brooks doesn’t trade a like a value stock, and this stock is going to have more appeal to investors who care more about growth and growth stories than by-the-numbers valuation. While I do like the long-term growth potential of both businesses, I would note cyclical risk in the semiconductor business and valuation risk in life sciences given the high level of investor enthusiasm for plays in that sector.
Looking Back At The Last Quarter
Brooks Automation’s fiscal first quarter highlights some of the strong-near growth opportunities at the business, as well as the ongoing meaningful operational leverage in the business. The company not only posted its third straight meaningful earnings beat, but also parlayed a 2.5% beat on the revenue line into an 8% beat on the operating income line.
Revenue rose 19% yoy as reported and 20% in adjusted organic terms to $250M, with the Semiconductor Solutions business up 7% yoy to $131M and the Life Sciences business up 32% yoy to $118M. Within the semi business, automation sales grew 41% and advanced packaging sales rose 78%, while contamination control-related sales declined about a third. At Life Sciences, Services revenue rose 28%, including 28% growth at GENEWIZ, while product revenue grew 53%, helped by demand related to COVID-19.
Gross margin improved almost five points from the prior year (to 46.3%), with Semiconductor margin up more than three points (to 42.8%) and Life Sciences up almost six points to 50.2%, with Services margin improving almost eight points to 53.1%.
Operating income was up strongly, roughly doubling on an adjusted basis, with margin up seven points to 17.5%. Profitability was strong in both segments, with Semiconductor segment margin up almost four points (to 16.4%) and Life Sciences margin up strongly to 18.8%.
Semiconductor Solutions Provides Ongoing Leverage To Leading-Edge Demand
With strong demand from end-markets like smartphones and enterprise networking, fabs and chip companies continue to see strong demand for chips produced on leading-edge nodes. That, in turn, continues to drive equipment demand for Brooks Automation.
The core of the Brooks story on the semiconductor side is in automation and contamination. Brooks is a leading manufacturer of robotics and automation systems used to handle/move wafers throughout the production process, with over 50% share in vacuum automation, 33% share in advanced packaging, and 70% share in contamination control.
The leading-edge angle has to do with the differences in manufacturing processes at the leading edges. Advanced manufacturing processes include many more deposition and etch steps, and that means more unit demand for Brooks’ tools. Likewise with advanced packaging, as advanced packaging offers performance advantages that are increasingly essential to customers (and requires more advanced tooling than simple wafer dicing).
On the contamination side, as circuits get smaller, they’re even more sensitive to particulate contamination, leading fabs to clean wafers and the boxes used to carry them between steps (front opening unified pods, or FOUPs) much more often, which drives more demand for the cleaning equipment Brooks sells.
I don’t want to push the comparisons too far, but by and large I think a way for readers to understand Brooks is to look at the demand drivers for companies like ASML (ASML) and VAT Group (OTCPK:VACNY) and plan accordingly – more next-gen chip production will drive more demand for advanced lithography equipment (ASML) and vacuum chambers (VAT Group), driving more demand for the automation systems provided by Brooks.
The semiconductor equipment business is cyclical, and that’s not going to change. That said, between drivers like 5G phones, 200G+ datacenter networking, AI/machine learning, and so on, I expect healthy underlying demand for Brooks for several years, even with the intermittent cyclicality.
Life Sciences – Even More Growth, And Less Cyclicality
Through more than a decade of M&A, Brooks has also built an exciting life sciences business. Previously focused on long-term sample storage (and consumables/equipment for prepping samples for storage), Brooks has expanded into growth markets like next-gen sequencing and DNA/gene synthesis.
Storage is still around half of the business, and Brooks manufacturers not only equipment and consumables used to preserve biological samples (blood, tissue, et al) for extended periods of time (including large automated freezers), but also storage services – a business that charges $0.50 or more per sample per quarter, with most samples stored for more than five years.
With the 2018 acquisition of GENEWIZ, Brooks also jumped in the genomics space. While the bulk (about two-thirds) of the GENEWIZ busines today is sequencing (next-gen sequencing and Sanger sequencing), there’s also a fast-growing DNA/gene synthesis business, and that’s a pretty exciting business.
DNA/gene synthesis not only has applications for research and product development in gene therapy, gene editing, vaccines, and antibodies, it also has applications on the manufacturing side. The production of gene therapies is not simple, and GENEWIZ has developed products like a proprietary reagent that helps identify mutations in AAV vectors, preventing costly downstream production failures.
I like the balance in the Life Sciences business between the steady, lucrative storage business and the higher-growth next-gen sequencing and synthesis operations. To be clear, storage is still a growing business, but I expect even more growth in the latter two businesses as companies in biopharma and agriculture look to harness more insights and drug targets from sequencing, as well as focus more on the development of biological treatments (antibodies, vaccines, gene therapies and so on).
The Outlook
Between semiconductor tools facilitating leading-edge production and the life sciences business, I believe Brooks Automation can grow revenue at a long-term rate in the high single-digits, and I don’t rule out the possibility of double-digit growth, particularly with the company having a healthy balance sheet and management having a lot of experience in finding value-adding deals.
The profitability of Brooks’ semiconductor business has always been cyclical, and likely always will be, but the full-cycle profitability is still good compared to many other tool suppliers; operating margins in the 20%’s over the next couple of years seem probable. While I don’t expect the Life Sciences business to be as profitable as the Semi Solutions business when the latter is at a peak, I do expect better full-cycle profitability. I expect Brooks to see its long-term average FCF margins grow into the mid-to-high teens (versus a high single-digit average in past) with the enlarged Life Sciences contributions.
The Bottom Line
Brooks Automation shares don’t look cheap on discounted cash flow, and I wouldn’t expect them to given where most other semiconductor tool and life sciences equipment/services companies trade now. The shares don’t look so bad on a multiple business, with a blended forward multiple of 6.1x on the basis of the profitability of the Semi Solutions business and the growth of the Life Science business, but here again they’re not exactly cheap.
If you want to invest in cheap life sciences plays (particularly companies leveraged to bioproduction and gene therapy/editing), you’re not going to find a lot, and what you find will probably be lower-quality. Of course, there’s also the possibility that Brooks will continue to exceed expectations, making today’s valuation look cheaper in retrospect. In any case, this isn’t a value stock, but the growth story is legitimate and has legs over many years. I have some broader concerns about overall sector/market valuation, but this is definitely a name to at least monitor for pullbacks.
This article was written by
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