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Stratec BioSystem


Baoxiaodao
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In some sense I feel like I am a treasure hunter, searching the whole world for those extraordinary businesses, buy them, and wait for the market to recognize it. That is why I love this game so much. If you bought Stratec in 2003, you would have made 50 times of your money in one of the worst holding period for stocks. And I forgot to mention, those are almost all(98%) organic growth.

 

I guess the prefix Bio would inevitably lead to an unfavorable impression of this company. Yes, most money spent on drug research, just like drilling holes on the ground, has vaporized in the thin air. But those who sell shovels to the gold rushers, cable connectors and underground rail systems for the mine have made decent or excellent returns on their investment. Stratec is such a company selling shovels in the Bio industry focusing on testing and diagnostics. Its flagship product is its analyzers for laboratory uses and has a installed base of 8000 worldwide.

 

Unlike many manufacturers which sell the machines directly, Stratec(SBS) signs long term contract with majors to develop analyzers as a part of the product offerings for hospitals or testing centers. That makes its revenue highly predictable. In addition, it avoids competitions VS those big marketers but does enjoy a unspectacular margin because of this business strategy. As usual, I encourage everyone to read the annual reports to get a full picture of the company, since I am really a bad narrator of any specifics.

 

So what is special about this company? After, It is trading at 20-24x estimated this year's earnings and have only 14m cash on its balance sheet. If there is anything wrong you might lose your shirts or even your pants. However, I do believe there is still money to be made(I am late on this one as well), and it will still reach my 20% hurdle without much difficulties.

 

The margin will expand meaningfully in the next few years. There are several things happening at the same time. First, SBS has a much stronger position in the market now and it naturally leads to better margins. Second, the production facilities are to be expanded due to pent-up demand. Scale of economics will lead to better margins. Third, the recurring revenue from the installed analyzers(8000 worldwide) will be a bigger part of total revenue and increase margin accordingly. Fourth, employee growth will always lag behind revenue growth(this has been the case in the last decade). Finally, the management is simply on of the best in the field.

 

Revenue will grow at a 15%+ in the next few years. I normally read management's guidance with a grain of salt, but I paid attention to this one. Upon signing the agreement with a partner, the contract could lead to 20 years of cooperation between the companies. According to SBS, it normally spends 3-4 years to develop a specific device for a partner, and it takes more than a decade for a partner to actively market it. So any contracts signed today will have meaningful impact on future earnings. And because the contract give a floor on the annual orders, the management has a very high confidence in projecting future revenues. Looking back on the contracts signed in the last few years, those devices designed are just being marketed and the revenues will flow in at an increasing speed.

 

(One of the reasons I dislike to invest in North America is that people are milking shareholders relentlessly. If things are going really bad, they can just walk away; if things going well, they reprice the options and win huge(thank you very much, management of Aberdeen International). In SBS, you see very minimum dilution from stock plan for the employees. The compensation is reasonable. So if the company has any upside, shareholders will almost get it for sure.)

 

The company should not be standing alone. In my opinion, SBS should have been acquired a long time ago. Part of the reason it did not get acquired is its high stock price. According to management, the company is spending 25% of revenues on R&D but 8% of revenues on R&D will be sufficient to sustain the current operation. Chairman is 65 years old(owns 41 percent of the company) and should he want to cash out, any PE firms will consider a serious bid for the company(but high quality companies normally do not want to sell to PE shops). My guess is that the company will not sell itself to any majors, for example Siemens, since it is doing business with a lot of companies competing fiercely with each other. But I would argue the value of SBS on the private market should be much higher than the current market cap.

 

Feel free to post after this thread. If I have any more thoughts, I would put it here.

 

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  • 3 months later...

"STRATEC announces agreement with Abbott Diagnostics

 

Birkenfeld, December 14, 2010

STRATEC Biomedical Systems AG, Birkenfeld, Germany (Frankfurt: SBS; Prime Standard, TecDAX) today announced that it has signed an agreement with Abbott Diagnostics, a division of Abbott Laboratories, Abbott Park, Illinois, USA (NYSE: ABT).

The agreement covers the co-development of an analyzer system solution, using STRATEC technology and provides further details about the manufacturing and supply by STRATEC.

Development of the system has already begun as part of a feasibility study. Further project and financial details have not been disclosed."

 

This board is value-oriented so I guess people just do not like an idea trading @ 25xP/E. Anyways, I still believe we can do 20% per year for the next 3-5 years even at today's price. By simply reading all the stuff on the Stratec website, it is not hard to understand why Stratec will grow significantly in the next few years.

 

Shai mentioned TZOO a while ago to me and it has been a real winner so far. It is not difficult to understand the business since I have hands-on experience with this industry, but I chose to pass it because my reluctance to dig deeper. I guess sometimes we have to fight ourselves to get out of our comfort zone.

 

Have a great holiday guys.

 

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