This Diagnostics Business Could be A Good Play on Shareholder Activism

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Since the beginning of the year, Alere (NYSE: ALR) has experienced a significant gain of nearly 34.3%, handily beating the S&P 500’s return of only 11.7%. Moreover, it is also the target of recent shareholder activism by one of its largest shareholders, Coppersmith Capital Management. Coppersmith owns around a 5.8% stake in the company, and is urging the company to divest three of its businesses to unlock potential shareholder value. Is Alere a good buy now? Let’s take a look.

Among three business segments, HIS produced losses

Alere is considered the global leader in providing point-of-care diagnostics and services, with strong presence in toxicology, diabetes and infectious diseases, operating in three main business segments including Professional Diagnostics, Health Information Solutions (HIS) and Consumer Diagnostics. Most of its revenue, $2.19 billion, or 77.7% of the total revenue, was  generated from the Professional Diagnostics segment, while HIS and the Consumer Diagnostics segment contributed only $535.4 million and $93.5 million, respectively, in 2012 sales. The Professional Diagnostics segment was also the biggest profit contributor, with more than $243 million in operating income. While the Consumer Diagnostics generated $12.7 million in profit, HIS produced a loss of $73.4 million in 2012.

Unlocking shareholders’ value

In the recent letter to Alere’s board, Coppersmith noted that it would nominate three candidates to the board at the company’s 2013 annual meeting. It suggested several steps to significantly improve the company’s operating performance, which could ultimately drive the share price much higher. First, Alere should divest several of its non-core businesses including HIS, the consumer diagnostics joint venture with P&G, and possibly the toxicology division. Coppersmith thought that the divestiture could be tax-free by first selling HIS for huge tax loss, and those divestments could produce more than $3 billion in proceeds.

As of March 2013, Alere had nearly $3.5 billion in net debt and only $2.12 billion in equity. In the past twelve months, the company produced more than $590.6 million in EBITDA. Consequently, the business sales would result in only around $500 million in net debt, significantly lower the leverage ratio to less than 1 times its net debt/EBITDA. Last but not least, Coppersmith would like Alere to deliver around $50-$100 million in annual cost savings by bringing the SG&A margin to the historical level prior to the business expansion in the past two years and minimize the corporate overhead.

Is Alere cheap now?

Alere is trading at around $24.50 per share, with the total market cap of $2 billion. The market values Alere at 9.4 times its trailing EBITDA. Compared to its peers, including Becton, Dickinson and Company (NYSE: BDX) and Healthways (NASDAQ: HWAY), Alere is not considered expensive. Becton, Dickinson and Company is trading at around $96 per share, with the total market cap of $18.7 billion. The market values the company at around 9.5 times its trailing EBITDA. Investors might be bullish about Becton, Dickinson and Company due to the fact that Becton Dickinson Rx, the company’s subsidiary, just received FDA approval for the drug in the BD Simplist line of ready-to-administer pre-filled generic injectable, helping clinicians to simplify the procedures of traditional vial and syringe injection sequence, reducing potential medication error. The company reported that it planned for an additional 20-30 drugs in the BD Simplist product line in the next several years.

Healthways is the most expensively valued among the three. At $17 per share, it is worth around $580 million on the market. The market values Healthways at 14.6 times its trailing EBITDA. Healthways is the provider of specific and personalized interventions to help customers improve physical, emotional and their social well-being, operating in North America, Brazil and Australia. Recently, the company has been upgraded to “buy” by Piper Jaffray analyst Sean Wieland, as he thought Healthways could become the leader in the “population health management” industry. He also raised the company’s target price from $11 to $19 per share. He wrote, “Healthways is the domain expert in population health management, yet has less than a 1% market share in this $1 billion per year opportunity." In the full year 2013, the company expected to generate $710-$750 million in revenue, with the EPS ranging from $0.25 to $0.35 per share.

My Foolish take

If Alere could sell their non-core businesses and bring more cash back, Alere’s balance sheet would be much stronger. Moreover, the company could focus its resources on its core business to drive the company forward. The expected $50-$100 million in annual savings could also affect its bottom line quite positively in the next several years. Indeed, Alere could be considered a buy at its current price.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Becton Dickinson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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