A Garage Band Making Good

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

Don't we all love stories about bands that started in garages like Blink 182 or The Hives or mega cap tech companies founded by two nerds in their parents' garage? (Think Apple, Google, Amazon, Hewlett-Packard). There's just something so All American about it. The most iconic of companies like Mattel, Harley-Davidson, and Disney share rags to riches beginnings in garages.

It's so fairy tale and mythic like the belief that anyone can grow up to be President or recreate the miracle in their own version of Apple's first home, the garage at 2066 Crist Drive, Los Altos, Cupertino, California.

An Up And Comer?

One rags to riches company that is an up and comer under most investors' radar is PerkinElmer (NYSE: PKI) started by one MIT professor and two of his students in 1931 in a garage in Massachusetts. MIT professor Harold Edgerton, famed as a pioneer of time lapse photography and his students, Kenneth Germeshausen and Herbert Grier, started the company as a specialist in electro-optics and led the way in the development of many of today's standard lab measurement devices like atomic absorption and infrared spectrophotometers to today's imaging technology that can detect one tumor cell out of one billion.

The company operates in two divisions, Human Health and Environmental Health, providing tech, services, and solutions for medical research, life sciences, environmental testing, and industrial measurement and analysis. As they advertise to the biotech trade,"...if rising attrition rates, regulations and recalls are slowing you down, PerkinElmer has the global expertise and knowledge to help you succeed faster." Their prenatal and neonatal screening expertise is used in 90 countries saving the lives of 50 babies every day. Click on video for more achievements. The company also has 3,300 patents.

All very inspirational and noble, however, the astronomical P/E (their first products were telescopes) makes it one of those high-tech, high valuation investing quandaries like Amazon. You think it's a promising company with world class innovation, but are you too early or are you too late? Like Amazon, the P/E of over 1800 (various finance sites give different P/Es, but they're all over 1800) comes down to a much less stratospheric forward P/E of 149.1. Sometimes reading P/Es like Amazon's and PerkinElmer's you think it's a misprint.

Analysts expects earnings of $2.31 per share for FY 12/13 for an earnings growth rate of 12%, but revenues look to stay right around $2 billion for the full fiscal year which they report on January 30.

The stock is up over 55% in the last year just pennies away from a 52 week high. This mid-cap name has better known and much larger competitors like Thermo-Fisher (NYSE: TMO), Agilent Tecnologies (NYSE: A), and Waters Corp (NYSE: WAT). All three rivals have lower P/Es at 21.58, 13.35, and 19.23 respectively and all except Waters Corp are within a dollar of 52 week highs. Waters would have been at a 52 week high, but a JPMorgan analyst downgraded Waters on January 3 based on increasing competition from peers. This scientific instrument and services sector is quite crowded but PerkinElmer is more diversified than Waters which specializes in liquid chromatography and mass spectrometry instrument systems.

Growth Drivers

Two things are powerful drivers of growth at PerkinElmer, the first being their prenatal and neonatal testing. They are collaborating with Illumina (which just announced its intention to acquire Verinata on January 7, maker of the verifi prenatal test for high-risk pregnancies) as commercial partners to market the verifi test in the US. This dovetails nicely with PerkinElmer's own leading edge tests as PerkinElmer CEO Robert Friel said," Integrating Verinata's non-invasive prenatal test with PerkinElmer's existing solutions ensures that physicians and patients have early access to the most advanced testing solutions to help protect the health of mothers and babies and we look forward to working with Illumina."

The other is a twist on electronic medical recordkeeping and the cloud with PerkinElmer as the sole provider of optimized electronic laboratory notebooks with its previous acquisitions of Cambridge Soft, Labtronics, and Artus Labs. It's working with Tibco Software on even more software for these notebooks that can be used through the entire chain from research to actual manufacture.

Their debt is high, no question, with the price to free cash flow at -8.40 but the company has strategically acquired Signature Genomic, VisEn Medical, Geospiza Inc, Dexela Ltd, Chemogen Biopolymer Technologie AG, and ID Biological Systems all in the short space of 2010 and 2011. Each buy strengthened a current area of expertise and while not necessarily immediately accretive were powerful additions to the franchise.

An Untold Story

The cost of all these purchases has hung heavy on earnings and investor sentiment. My take is that these were investments in making themselves leaders in the areas of informatics, myriad forms of scientific testing, and genome sciences.  They are positioning themselves to compete on a more level playing field against Agilent and Thermo Fisher. Now is the time for them to start growing top line revenues and pay off debt. If this isn't addressed on the January call I would think twice about this name.

The company was a small cap not so very long ago and with a $4.5 billion market cap is knocking on the door of big-cap very soon. Unlikely to be acquired but more likely to be an acquirer or partner these strategic purchases and collaborations and achievements are an untold story (and hopefully not just a fairy tale) about a garage band that's making good.

leglamp has no position in any stocks mentioned. The Motley Fool recommends Thermo Fisher Scientific. 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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