In November of last year, I believed that life science play Azenta, Inc. (NASDAQ:AZTA) suffered a bad diagnosis itself. Formerly known as Brooks Automation, Azenta came into existence following the sale of the semiconductor business, to become a pure play on life sciences.
The success of this standalone business has been lagging, in fact, the (profit) performance has been utterly disappointing. Incoming management hopefully can improve the business case, but that remains a big if.
Where Are We Coming From?
Following a $3 billion deal with Thomas H. Lee Partners in 2021, under which former company Brook Automation sold its semiconductor business, the company became a pure play in life sciences. Enthusiasm on the sum-of-the-part calculation drove shares above the $100 mark, even trading around a high of $120 per share.
The remaining life science business grew sales by more than 30% to just over half a billion. Trading at the peak around $120 per share, the company was valued at nearly $9 billion, including a huge pro forma net cash position of around $3 billion (considering the life science sale proceeds). Despite these proceeds, resulting valuations were demanding.
This resulted in a 12 times sales multiple attached to the life science business, on top of which, it was very concerning that these activities were hardly profitable.
Through 2022, shares lost half their value, as they have largely traded around the $50 mark ever since. By November 2022, Azenta grew fiscal 2022 sales by 8% to $555 million. While this looked solid, adjusted earnings were posted at just $0.51 per share, up a mere three pennies on the year before. This did not only result in huge earnings multiples, but these were (very) adjusted earnings as well.
The company was using part of its cash balances to announce some bolt-on acquisitions, as well as to buy back stock. Through the fiscal year 2023, the company has seen sales growth as valuations continued to come in. Following share buybacks, the share count was cut to 63 million shares, trading at $48 in November of last year.
This valued shares at a mere $3.0 billion, including a $1.3 billion net cash position at the time. This valued the life science business at just $1.7 billion and, based on sales seen around $650 million per annum, this resulted in very modest sales multiples at around 2.6 times (comparing to an implicit 12 times multiple in 2021!)
All this looked more comforting, but the company was seeing pressure on margins, and if not for net interest income received on cash balances, the business was really losing money. Given this background, I decided to keep a close eye on the shares, seeing no reason to get involved with the shares just yet.
Coming Down
Shares initially rose to the $65 mark at the start of the year amidst some optimism, but gradually these shares have fallen to current lows of $45 per share. This came after the company posted a 20% increase in 2023 sales to $665 million, but adjusted for dealmaking efforts, organic sales were down a percent.
Adjusted earnings for the year were posted at $0.31 per share, down twenty cents on the year before, with the declines held back by share buybacks. Adjusted EBITDA was reported at a mere $30 million, essentially cut in half. One of the few green shoots was that fourth quarter organic sales were up 2%, with adjusted earnings down just three cents to $0.13 per share, driven by the initial effects of cost-saving programs.
The company provided a relatively solid guidance for 2024, seeing sales up to $696-$718 million, with organic revenue growth seen between up 5% and up 8%. Moreover, EBITDA margins were seen up some 300 basis points, as given this background, I was somewhat negatively surprised to see adjusted earnings at just $0.19-$0.29 per share.
Valuations remained pressured as the share count was down to 60 million shares, putting pressure on net cash balances as well, reported at around $1.1 billion.
2024 — A Tough Year
The company surprised the market somewhat in February, as it reported a 15% decline in organic sales. First quarter sales were down 13% to $154 million, which the company attributes to a 70% fall in B Medical Systems sales to just $13 million. The company attributed this to the timing of orders and subsequently, investors were not reading too much into the soft start.
Despite the decline in sales, the company managed to squeeze out adjusted earnings of two pennies. The company reiterated the full-year guidance, which backs up the claim by management that this is due to the timing of orders, but of course, the risks to the full-year guidance were increasing.
A partial recovery was seen in May, when second quarter sales were reported up 7% to $159 million, aided by a recovery in B Medical Systems sales. The company posted adjusted earnings of five pennies, up on a sequential and annual basis, but nothing too convincing.
The company furthermore cut the full year sales guidance to $659-$671 million, which suggested hardly any growth. With margins seen up a similar 300 basis points, I was surprised to learn about the full year adjusted earnings guidance being hiked to $0.27-$0.37 per share, likely due to higher interest income.
Around the same time, Azenta announced the departure of its CEO, Stephen Schwartz. In August, third quarter sales were posted up 4% to $173 million, with adjusted earnings posted at $0.16 per share. The company trimmed the midpoint of the full year sales guidance further, down another ten million to $655 million, suggesting flattish sales overall for the year, with adjusted earnings now seen between $0.30 and $0.36 per share.
What Now?
Following continued and aggressive share buybacks, the share tally has come down to 53 million shares, granting the company a $2.4 billion equity valuation at $45 per share. This includes a $744 million net cash position, for an operating asset valuation of around $1.7 billion, suggesting that operating assets are valued around 2.5 times sales.
With operating assets valued around $30 per share, Azenta, Inc. trades at 100 times adjusted earnings, a nosebleed high earnings multiple. The problem is in the reconciliation of the results, as the discrepancy between GAAP and non-GAAP earnings is huge, with quarterly GAAP losses reported at $0.12 per share, for a $0.28 per share discrepancy. This is driven by mostly amortization charges, and to a lesser extent, restructuring and transformation charges, but fortunately no stock-based compensation expenses being adjusted for.
Moreover, earnings are pressured, as the company continues to buy back stock, thereby depleting net interest income. Fortunately, new leadership has come in this month, in the person of John Marotta, bringing long-term experience in the industry.
Mr. Moratta hopefully should be able to turn the ship. While the revenue base is strong enough, although organic growth is lagging, the real achievements to be made relate to the margin profile of the business which needs desperate improvements.
With still no convincing green shoots seen, and net cash down significantly amidst continued buybacks, I am leaning very cautious here about Azenta, Inc. stock despite the optical low sales multiple. That said, I am keen to keep a close eye on the prospects of the business under the new leadership, but do not expect immediate results just yet.
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