In April 2021, I concluded that shares of Bio-Techne Corporation (NASDAQ:TECH) looked a bit rich as investors were pricing in the qualities of this stealth M&A play. The company delivered on steady growth for investors through the combination of steady organic growth and bolt-on M&A, although that these qualities were priced in already.
This rather under-covered stock deserved some more attention given its strong underlying business and long term value creation for shareholders. While under-covered on this platform, investors have historically attached high valuations to the Bio-Techne Corporation business.
The Former Case
I started to cover shares of Bio-Techne Corporation in 2016, at the time mostly consisting out of a $327 million biotechnology business which develops and sells diagnostic solutions. These were incredibly lucrative activities, with margins reported around 50%. This was complemented by a $60 million Clinical Controls business and a $66 million segment following a $300 million deal for Proteinsimple, although the company has now consolidated its operations across two divisions called protein sciences and diagnostics & genomics.
Together, these activities of the company reported $450 million in sales, on which margins in the low thirties were reported. Shares traded around $110 at the time, translating into an earnings multiple in the mid-thirties. Note that this price is not comparable following a four-for-one stock split executed in 2022, working down to a split adjusted share price of $27 and change here as of today. At those levels, I initiated a far too small position – with the benefit of hindsight.
Forwarding to 2021, when I last covered Bio-Techne, and the company has seen steady growth, with revenues up 4% for the year 2020 to $739 million. Moreover, operating earnings of $157 million were quite similar to 2016 in dollar terms, even amidst small dilution seen in the shareholder base over this period of time.
Adjusted earnings came in at $4.50 per share (pre-split), or even a bit below the $4 per share mark after backing out stock-based compensation (“SBC”), with shares trading around the $400 mark ($100 mark at today´s levels following the share split).
The resulting 100 times earnings multiple and $15 billion market valuation made that expectations had risen a lot, while the operating performance has been a bit softer than anticipated, a combination which made me very cautious.
What Happened?
Fast forwarding to today, we have seen shares rise to levels in the $130s in 2021 (or $520 on a pre split basis) as shares have gradually come down over the past two years, with shares now trading at $82, after trading in the low seventies in recent months.
Forwarding to the summer of 2022, the company posted its fiscal 2022 results for the year ending in June. The company saw a solid year, with revenues up 18% to $1.10 billion, after 2021 was quite solid as well. GAAP operating profits rose substantially to $296 million, as GAAP earnings of $272 million worked down to earnings of $6.63 per share ahead of the stock split, as the company operated with a rather flattish net cash position.
In March of this year, Bio-Techne Corporation announced the acquisition of a 20% ownership stake in Wilson Wolf for $257 million, with the option to acquire the remaining stake in the business for a billion valuation, or perhaps less if certain milestones with regard to sales and EBITDA are not achieved in the coming years. Wilson Wolf is a developer and manufacturer of cell production technology used in Cell and Gene Therapy and moreover the company has the potential to make a meaningful contribution, certainly as it reported trailing EBITDA in excess of $55 million.
In May, Bio-Techne posted its third quarter results for the fiscal year 2023. So far this year, both sales and earnings have hardly advanced, with sales up around just over 2% in the first nine months of the year, while earnings trends are flattish as well.
The Bio-Techne Corporation share count rose to 161 million, but that is a technicality following the split of course, with the company now awarded a $13.2 billion valuation at $82 per share. Net debt stood at $213 million, ahead of the investment in Wilson Wolf, making that net debt will come in close to half a billion, for still very modest leverage ratios, at just over 1 times EBITDA.
What Now?
Needless to say, Bio-Techne Corporation valuations remain demanding. Based on the current revenue trends, the company trades around 12 times sales. Adjusted earnings trend close to $2 per share, but adjusting for stock-based compensation, I peg realistic earnings close to $1.70 per share.
Based on such earnings power, an 80-100 times earnings multiple back in 2021 has come down a bit, but still comes in at nearly 50 times realistic earnings. While the quality of the Bio-Techne Corporation business, its margins, and the long term potential are still great, lately growth has not been too convincing.
This makes that I do not feel enticed yet to get involved with Bio-Techne Corporation, even as I am happy to pay a premium multiple for such a quality business.
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