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In late April, I took a look at stocks Broker Company (NASDAQ:PRCR) The company pursued an aggressive acquisition strategy, which included some small deals and two larger acquisitions, with the pace of deal making increasing Raised some questions.
Given the recent spate of dealmaking that has had a significant and largely unknown impact on Broker, there has been little clarity regarding the impact of these deals on sales, earnings and debt.
I had hoped and believed that more clarity would be provided alongside the first quarter results, but that did not happen. In fact, unexpected stock selling adds to the confusion here.
Leading the post-genomic era
The title above is Bruker’s mission, as the company has tried to reinvent and transform itself into a fast-growing company recently. Founded in 1960, the company has focused on high-value analytical techniques and more Time has transformed businesses with the emergence of new technologies.
Looking to 2022, the company has generated about $2.5 billion in sales with a workforce of about 8,500 workers. The company saw significant momentum in 2023, a year in which revenues rose about 17% to $2.96 billion. About 90% of these sales are derived from scientific instruments, with Energy & Supercon technologies making up the remainder of sales.
The company develops and sells equipment used in the life sciences, analytics, semiconductor, materials, packaging and other industries. Thanks to its strong geographical coverage, the company is fully diversified and is truly a global company. While overall momentum was strong in 2023, that was only partially reflected in the bottom line, with adjusted earnings up just 10% to $2.58 per share.
The reported pace of growth in 2023 was impressive and may be expected given the company’s location. But the truth is that growth performance in the past has been less impressive. While previous growth was somewhat disappointing, growth on a per-share basis has been a little better, after the company retired about 15% of its shares over the past decade.
On the back of momentum, shares rose to a high of $95 per share in March, with shares starting the year trading at around $70. After a strong 2023, the company guided 2024 sales to rise about 10% to $3.26 billion, with organic growth of about 6%, and projected adjusted earnings of about $2.75 per share. This resulted in a 35 times adjusted earnings multiple at the high of $95, and still requires 28 times earnings at $78 in April.
Huge deal making spree
After a strong 2023, the company has been very aggressive in deal making. The company announced the purchase of Nion, Tornado Spectral Systems, Chemspeed, Spectral Instruments Imaging and another smaller Japanese company earlier this year, and all of those deals were real.
Furthermore, the company announced two larger deals. In February, the company concluded an €870 million deal to acquire ELITech. This European molecular diagnostic systems business will add approximately €150 million to sales, paying approximately 6 times sales.
In April, the company announced the purchase of NanoString Technologies. The company spent $393 million to acquire a provider of spatial transcriptomics and gene expression analysis services. Coming out of bankruptcy, the $168 million sales contribution looks cheap, but real questions can be asked about the margin profile, of course.
The combined deal value of all these deals was estimated at between $1.5 to $2.0 billion, resulting in net pro forma debt rising to $2.3 to $2.8 billion. Amid an uncertain preliminary EBITDA figure, I thought leverage ratios would increase to around 3x, although there were many uncertainties about this. I anxiously awaited the first quarter earnings announcement, searching for more evidence.
About the results
In early May, Bruker closed on a deal to acquire ELITech and the deal is expected to boost earnings by $0.08-$0.10 per share over the remainder of the year. In the press release, the company also confirmed that its non-GAAP operating margins exceed 20%.
Along with that announcement, the company reported a 5% increase in first-quarter sales to $722 million, with organic growth coming in at just 1% and change, which the company attributed in part to about $15 million in revenue that fell into the second quarter. The company raised its full-year sales guidance by sixty million dollars to a figure of $3.32 billion, seeing adjusted earnings of between $2.79 and $2.84 per share. The rise is modest considering that ELITech will contribute about $100 million in revenue this year (plus Unknown contribution to revenue from many small deals).
However, this excludes any contribution from the pending NanoString deal and comes after adjusted first-quarter earnings fell 11 cents to $0.53 per share amid strong margin pressure and modest organic growth.
Despite the weaker quarter, the company maintained a full-year organic growth rate of 5-7%, which of course raises the bar after a weaker organic growth performance in the first quarter. Net debt was reported at $1.04 billion, but of course, that was before the larger deals, as smaller deals were closed during the quarter at a combined cost of $275 million. With the closing of the ELITech and NanoString deal after the quarter, pro forma net debt is expected to reach $2.4 billion.
Dive into the numbers
On the conference call, management was not really addressing questions regarding potential dilution and leverage impact, though it was emphasized that gross leverage was seen around 3.5 times, with net leverage clearly lower in such a situation. While the company provided a modest increase in full-year guidance, this increase was actually lower than expected.
Overall, more questions were asked than answers given in early May as shares fell to the $70 mark on uninspiring earnings expectations and commentary. Days later, Broker closed the deal to buy NanoString in a deal valued at $393 million, in effect sending the stock back into the mid-70s.
The real bombshell report came at the end of May as the company announced the sale of 6 million shares in a deal scheduled to close on May 31. Although prices have not yet been announced, shares have fallen from the mid-70s to the $66 level at the time of writing. This puts total proceeds at around $400 million, excluding the green shoe option. This brings the initial net debt load of $2.4 billion down to $2.0 billion, a significant difference.
The 146 million shares will rise to about 152 million shares, yet a 10% share price drop when the stock is sold seems like an overreaction to a dilution of only 4%, while net debt will be meaningfully reduced. Amid all this, investors seem to be disappointed by the lack of clarity, and an inconsistent capital allocation strategy (following a share buyback last year), but overall the appeal has increased slightly.
This means the 28x earnings multiple as of April has fallen to around 24x here, while net debt comes in slightly lower, which is a net positive. On the other hand, these remain inconsistent management actions and disappointing organic growth in the first quarter, creating many moving factors.
minimum
Realizing that Bruker was trading stocks in the mid-50s last fall, I was drawn to this pullback. However, the question marks outweigh the relative attractiveness emerging here, which makes me very cautious and not yet ready to buy this dip just yet.
