Bio-Rad Laboratories, Inc. (BIO, Financial) is maintaining the torrid rate of growth that has made it one of the most exceptional performers of the past half-decade. This year, the life science research and clinical diagnostics company has posted two more surging quarters that boosted its earnings per share significantly:
That performance has attracted investors and driven up its share price:
About Bio-Rad
The Hercules, California-based company describes itself on its website as a developer, manufacturer and marketer of “innovative” products for the life science research and clinical diagnostic markets.
Its main customers include universities and research institutions, hospitals, public health and commercial laboratories, biotechnology and pharmaceutical organizations. It also has applied laboratories that deal with food safety and environmental quality. This slide from its December 2020 outlook shows what their most important customers have been buying and where they are located:
As the descriptions suggest, the company operates through two segments: Life Science and Clinical Diagnostics. The former segment sells instruments, software, consumables, reagents and content for areas such as cell biology, drug discovery and food safety. The latter deals with diagnostic products and systems that deliver “high-value” clinical information for the blood transfusion, diabetes monitoring, autoimmune and infectious disease testing markets.
Competition
In its 10-K for 2020, Bio-Rad explained that the markets it serves are highly competitive; thus, it focuses on market segments with specific competitive advantages. It breaks down its competitors by segment:
- Life Science competitors vary by product and include the following major companies: Becton Dickinson (BDX, Financial), GE Biosciences (GE, Financial), Merck Millipore and Thermo Fisher Scientific (TMO, Financial).
- Clinical Diagnostics competitors include Roche (RO), Abbott Laboratories (ABT, Financial), Siemens (SIE) and Danaher (DHR, Financial).
The following chart shows how Bio-Rad’s performance lagged those of Becton Dickinson and Roche during the first half of the decade, then pulled well ahead:
Recent results
The following table summarizes the company’s recent GAAP results for full-year 2020, Q1 2021 and Q2 2021:
In the second quarter earnings release, Bio-Rad updated its guidance to currency-neutral revenue growth of 10.0% to 10.5% for the full year and estimated its non-GAAP operating margin would be about 19.0%
Financial strength
The strong showing for the company's financial strength is a result of a small debt load, at least in relation to Bio-Rad’s cash holdings. That ties in with the high Altman Z-Score.
The only troubling metric on this page is that of the return on invested capital (ROIC) and the weighted average cost of capital (WACC). When a company’s ROIC is lower than its WACC, then it is destroying capital and value as it grows. Yet, as this 10-year chart shows, this relationship has been typical through almost all of the past decade for Bio-Rad:
Profitability
The details on the profitability table also refute the idea that Bio-Rad is a weak financial performer. First, it enjoys high margins (reflecting competitive advantages):
We also see above-average strength in its return on equity and its return on assets. ROE is higher than 93.03% of its peers and competitors in the medical devices and instruments industry, while its ROA is higher than 95.33% of peers.
The growth rates reveal that while revenue has increased modestly over the past three years, the company has significantly improved its Ebitda and EPS. That suggests the company is becoming more effective and efficient in its operations.
From a longer-term perspective, this chart shows their growth over the past decade:
The upward surge in Ebitda and EPS (diluted) began in the fourth quarter of 2019, several months before the Covid-19 pandemic emerged. Still, providing Covid-19 testing materials boosted the company’s bottom line, as President and CEO Norman Schwartz pointed out in the fourth quarter and full-year earnings release:
“While many of our markets are still operating at less than 100 percent, our COVID-19 related products surpassed expectations in the fourth quarter, and we experienced a larger than normal end-of-year budget release. All of this combined to produce a strong finish for the year.”
Dividends and share buybacks
Bio-Rad does not pay a dividend. However, it has slowed its share issuances in the past three years:
Valuation
The below share price chart tells us there are frequent pullbacks with Bio-Rad, and those are the times for prudent investors to take a position:
And, of course, the trendline reveals that the stock price has risen by an average of 30.70% per year over the past five years. That’s more than double the rate of the S&P 500 index:
The slope on the Bio-Rad chart suggests this could be an overvalued chart, and indeed, the GuruFocus Value Line concluded that the firm is significantly overvalued.
However, when we look at the growth rates the company is acheiving, it doesn't look overvalued at all. It has a price-earnings ratio of 5.59, which is below 92.69% of companies in the industry. Combining that with an Ebitda growth rate averaging 88.80% per year over the past five years nets a PEG ratio of just 0.06, well below the fair value mark of 1.0.
Gurus
In their buying and selling of Bio-Rad shares over the past two years, gurus have mostly been bearish, with the exception of the first quarter of 2021:
Ten gurus have positions in the company. The three largest among them are:
- Ken Fisher (Trades, Portfolio) of Fisher Asset Management, who trimmed his firm's stake in the second quarter, reducing it by 5.86%. That left him with a total of 148,152 shares, good for a 0.50% position and representing 0.06% of his funds’ holdings.
- John Rogers (Trades, Portfolio) of Aerial Investment added 4.04% to finish the quarter with 51,301 shares.
- Jim Simons (Trades, Portfolio) of Renaissance Technologies was in and out of the company during the second quarter and finished with 51,300 shares.
Conclusion
If there is any word that sums up the state of Bio-Rad Laboratories, it would have to be "growth." As we’ve seen, it has achieved exceptional Ebitda and EPS growth, and this has been responsible for investors driving the growth of the share price.
Such results indicate the company has at least several competitive advantages in a competitive industry, and while the share price appears to be high, Ebitda growth suggests it may be undervalued.
On that basis, and assuming they are prepared to live with a modest amount of debt, value investors may wish to take a closer look at Bio-Rad. Growth investors also might be interested, but both groups should wait for a dip in the price.
