Summary
- PerkinElmer has been a huge beneficiary of Covid-19 thanks to its diagnostics business.
- Shares have done well this year, but momentum has been reasonable.
- Additional earnings power provides a huge windfall, as the market has been reasonably conservative in pricing/extrapolating current trends.
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PerkinElmer (PKI) is a long-term hidden gem that has created a lot of term value for investors over the past decade. A combination of good positioning towards attractive growth markets, combined with bolt-on M&A, has been a key driver behind decent long term returns for investors.
So far in 2020 shares have actually enjoyed a boost thanks to Covid-19 and given this price advancement as well as action on the M&A front, it is time to update the investment thesis.
The Old Thesis
My last take on PerkinElmer dates back to the summer of 2017 when the company announced the $1.3 billion purchase of EUROIMMUN. This purchase followed the sale of its medical imaging business to Varex Imaging (VREX) and given the share price performance of Varex ever since, this, arguably, has been a good decision.
The deal for EUROIMMUN was very attractive in my eyes as it added $310 million in sales while delivering 20% annual growth on average in the five years ahead of that purchase. This deal added meaningfully to the $2.1 billion revenue base of PerkinElmer, generated across the globe as that deal would not just add scale, yet further provide diversification across segments and geographic regions as well.
The core of the business is the discovery & analytical solutions business, generating $1.5 billion in sales from life science, food, environment and industrial end markets. Think of imaging, detection, software, service and IP which are driving these sales from products like chromatograph, sample introduction systems and atomic spectroscopy instruments, among others.
The diagnostics business generated $600 million in sales at the time. This business provides early detection of genetic disorders from pregnancy to early childhood and disease testing. This created a business with pro-forma sales around $2.4 billion although valuations were reasonably full around the $70 mark with pro-forma earnings trending around $3.25 per share, although net debt of $1.8 billion translated into an elevated leverage ratio of around 4 times with EBITDA trending around $450 million.
With shares trading around 21 times pro-forma earnings and leverage being on the high side, I looked forward to initiating a position on dips, yet those dips never took place anymore with shares only trending higher from there around the $70 mark, driven by the positioning which included an organic growth rate around 5% per annum.
