Bio-Techne: Stealth M&A Play Looking Rich Here
Summary
- Bio-Techne has been a steady value creator, operating largely under the radar of many investors.
- The company has combined organic growth with bolt-on M&A to establish this growth.
- While the long term growth and promise is to be applauded, a great deal of the quality and continued growth has been priced in already.
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Bio-Techne (NASDAQ:TECH) has been a wildly undercovered stock on this platform, not for any good reasons as the long term value creating track record of the company is quite solid.
I covered the company and the stock in 2016, nearly five years ago and concluded that I was cautious on the stock at that moment, yet ended up buying a small position on a dip early in 2017. That investment has actually done well, very well, but as the share price performance has outpaced the operational performance a great deal, it is time to take some profits here.
A Review Of The Thesis
When I reviewed the investment case of Bio-Techne in 2016, the company announced a bolt-on deal which followed years of M&A activity to diversify the business, which at the time did come at the expense of margin compression. While I was not convinced about the timing in the summer of 2016 amidst higher expectations, I believed it could be a well positioned and good long term stock.
At the time the company was mainly comprised out of a $327 million biotechnology business, developing and selling diagnostic solutions. This is a very lucrative activity, with operating margins at around 50%. This was complemented by a $60 million Clinical Controls business, generating respectable margins around 30% at the time. The company had a third unit after the 2014 purchase of Proteinsimple in a $300 million deal. That unit grew sales more than 20% to $66 million.
All in all, the company generated just over $450 million in sales as the diversification strategy meant that GAAP margins had come down from a very high 54% in the decade before to still a respectable 32% of sales in 2015. On top of the three segments of the company, Bio-Techne reported another deal in 2016, that of the $250 million purchase of Advanced Cell Diagnostics, in a deal adding $25 million in sales. Based on that deal and developments throughout the first half of 2016, I noted that the business likely would top $500 million in sales as operating earnings of around $150 million could result in net earnings of $110 million, or $3 per share based on a share count of 37 million shares. To clarify, these are GAAP earnings.
Net debt of $330 million worked down to a 1.7 times leverage ratio based on $190 million in EBITDA. With shares trading around the $110 mark, it was evident that multiples were elevated in the mid-thirties. This was in part driven by an ambitious plan to grow sales to a billion in 2019, while maintaining operating margins at 30-35% of sales. That looked quite ambitious, assuming not too much leverage or dilution would be incurred.
Amidst this, I concluded to initiate a small position if shares were to fall below the $100 mark. Shares fell to those levels late in 2016 and early in 2017. On the back of that move I have initiated a small position, far too small with the benefit of hindsight, as it is time to consider reestablishing a thesis now.
Fast Forwarding To Today
If we make a 4-year jump in time, we arrive at the summer of 2020 when Covid-19 has the world in its grip and when the company reported its 2020 results. The company grew annual sales by 4% to $739 million with growth held back by a softer fourth quarter. My prediction that the billion revenue number by 2019 was looking too optimistic has fully worked out as a later than the original timeline, only 50% of anticipated growth was delivered upon.
The company reported GAAP operating earnings of $157 million which is largely the same as 2016 despite some acquisitions being pursued in the intermediate period as the diluted share count increased modesty to 39 million, revealing approximately 5% dilution over the same period of time. Net debt has been cut back to a level below the $100 million mark, for a very modest leverage ratio.
The company reported adjusted earnings of $4.55 per share, or $179 million in actual dollar terms, as net earnings surpass the GAAP operating profits. This came after this number excludes $60 million in amortization charges which I am happy to adjust for, yet it excludes $34 million in stock-based compensation as well. This runs at nearly a dollar on a pre-tax basis, making realistic earnings likely come in around $3.75-$4.00 per share in my book.
With shares having risen to $400 and change, it is needless is to say that valuations have risen a great deal with the equity valuations surpassing $15 billion, and shares are trading at 100 times realistic earnings. A great deal of this advancement has taken place over the past year with shares having doubled since the outbreak of the pandemic amidst anticipation of investors that the company could benefit from the pandemic and need for testing.
Since the release of the annual results the company has announced multiple collaborations and other strategic initiatives. The dip in fourth quarter revenues was short-lived as first quarter sales rose 10%, with growth accelerating to 19% in the second quarter.
Truth be told is that the revenue growth has been accompanied by quite impressive leverage on the bottom line, with adjusted earnings trending at $6 per share, and realistically running around $5 per share as the company has already built up a net cash position over the past quarter while the revenue run rate has grown to $900 million. Despite the modest momentum in the run rate, the company is still trading at 17-18 times sales and trades around 80 times earnings!
Another Deal
To further grow the business Bio-Techne announced the $215 million purchase of Asuragen. The 2006 founded company develops and produces genetic carrier screening and oncology test kits. With a revenue contribution of $30 million, Bio-Techne is paying a mere 7 times sales multiple, although this could increase to roughly 10 times as potential contingent payments increase the purchase price by another $105 million. Even in that case, Bio-Techne is adding sales at a much more favorable multiple compared to its own multiple.
That said, the impact on the business is modest, with the deal adding 3-4% in sales as the overall investment thesis remains dominated by a very high valuation at 17 times ales and 80 times earnings. Having quadrupled my investment in less than 5 years seems like a very decent return, even if the investment is rather small. I am taking profits on this name, yet continue to keep an eye on Bio-Techne in the long run given its excellent bolt-on M&A acquisition strategy on top of solid organic growth rate.
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This article was written by
The Value Investor has a Master of Science with specialization in financial markets and a decade of experience tracking companies via catalytic company events.
As the leader of the investing group Value In Corporate Events they provide members with opportunities to capitalize on IPOs, mergers & acquisitions, earnings reports and changes in corporate capital allocation. Coverage includes 10 major events a month with an eye towards finding the best opportunities. Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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