Bio-Reference Laboratories, Inc. (BRLI)
Rating: Outperform
Company Profile: Aggressive Growth
Market Value: $455 Million
________________________________________
Stock Falls on Short Reports; Acknowledge Risks But Believe Is Trading Well Below Inherent Value
• There have been two short reports published by a blog called "The Street Sweeper" over the past two weeks (one on November 1 and the second November 10). While it is possible to address the articles point by point, in general, much of the information in the two short reports has been sensationalized and has been known already.
• "The Street Sweeper" was itself short, about 97,000 shares before publishing the first article and proceeded to cover its short position over the week following publication; "The Street Sweeper" had no share short ahead of the publication of its second article. For that reason, we have been reluctant to give any validity to the articles by responding. Given the stock performance on Friday as a result of these short articles (stock closed down 21% Friday and is down 37% since November 1), we feel compelled to comment.
• Bio-Reference has been operational for 25 years. While the company may be at fault for keeping in place relationships it had as a much smaller company-for example continuing to use a local auditor that it has been using since the 1980s-based on all of the due diligence we have done over the past three to four years covering the stock, we believe that this is a real business and that the company has been gaining share to drive above-average revenue growth.
• We have had the opportunity to talk to management a number of times over the past two weeks and it seems there is a realization that some changes need to be made to bolster confidence in the company's financial controls and business opportunity, including building a relationship with a Big Four auditor (although the company is currently completing its fiscal 2011 audit and will report results at the end of December) and implementing more aggressive share-buyback programs. The company announced a 1 million share-buyback authorization late Friday. In addition, at this point with the stock trading at 0.6 times 2012 revenue and 4.2 times 2012 EBITDA (versus its three-year averages of 1.6 times and 12.8 times, respectively), we believe management has to evaluate strategic alternatives such as taking the company private.
• In terms of putting new money to work in this name, we view this as a high-risk, high-reward opportunity. There is the potential that the high level of noise generated by the two articles around this company as well the recent stock performance could invite scrutiny by regulatory agencies, which is difficult to predict. Based on the stock performance over the past two weeks, this type of risk is being discounted in the stock at least to some degree and could remain an overhang on the stock for some time.
• The stock is trading at 8.9 times our calendar 2012 estimate of $1.39 (versus its three-year average of 19.9 times and as compared to LabCorp (LH $83.81; Outperform) and Quest (DGX $57.54; Market Perform) at 12.1 and 12.5 times, respectively). Typically Bio-Reference trades between 1.0 and 1.5 times revenue (versus current 0.6) and 8.0 to 10.0 times EV to EBITDA (versus current 4.2). Over the last two years, lab transactions have occurred at an EV-to-sales multiple of around 1 to 2 times sales and for more esoteric labs closer to 2 to 3 times or more.
• While we acknowledge there is a lot of noise around this name, we believe this company is worth significantly more for the reasons discussed above. Moreover, we believe management could make changes over the next year to bolster confidence in its financial controls, perhaps a relationship with a Big Four auditor. Given our view that Bio-Reference Labs is a viable, growth business, over the long term we believe the stock should reflect a value closer to historical value ranges (e.g., 1.0 to 1.5 times revenue).
Rating: Outperform
Company Profile: Aggressive Growth
Market Value: $455 Million
________________________________________
Stock Falls on Short Reports; Acknowledge Risks But Believe Is Trading Well Below Inherent Value
• There have been two short reports published by a blog called "The Street Sweeper" over the past two weeks (one on November 1 and the second November 10). While it is possible to address the articles point by point, in general, much of the information in the two short reports has been sensationalized and has been known already.
• "The Street Sweeper" was itself short, about 97,000 shares before publishing the first article and proceeded to cover its short position over the week following publication; "The Street Sweeper" had no share short ahead of the publication of its second article. For that reason, we have been reluctant to give any validity to the articles by responding. Given the stock performance on Friday as a result of these short articles (stock closed down 21% Friday and is down 37% since November 1), we feel compelled to comment.
• Bio-Reference has been operational for 25 years. While the company may be at fault for keeping in place relationships it had as a much smaller company-for example continuing to use a local auditor that it has been using since the 1980s-based on all of the due diligence we have done over the past three to four years covering the stock, we believe that this is a real business and that the company has been gaining share to drive above-average revenue growth.
• We have had the opportunity to talk to management a number of times over the past two weeks and it seems there is a realization that some changes need to be made to bolster confidence in the company's financial controls and business opportunity, including building a relationship with a Big Four auditor (although the company is currently completing its fiscal 2011 audit and will report results at the end of December) and implementing more aggressive share-buyback programs. The company announced a 1 million share-buyback authorization late Friday. In addition, at this point with the stock trading at 0.6 times 2012 revenue and 4.2 times 2012 EBITDA (versus its three-year averages of 1.6 times and 12.8 times, respectively), we believe management has to evaluate strategic alternatives such as taking the company private.
• In terms of putting new money to work in this name, we view this as a high-risk, high-reward opportunity. There is the potential that the high level of noise generated by the two articles around this company as well the recent stock performance could invite scrutiny by regulatory agencies, which is difficult to predict. Based on the stock performance over the past two weeks, this type of risk is being discounted in the stock at least to some degree and could remain an overhang on the stock for some time.
• The stock is trading at 8.9 times our calendar 2012 estimate of $1.39 (versus its three-year average of 19.9 times and as compared to LabCorp (LH $83.81; Outperform) and Quest (DGX $57.54; Market Perform) at 12.1 and 12.5 times, respectively). Typically Bio-Reference trades between 1.0 and 1.5 times revenue (versus current 0.6) and 8.0 to 10.0 times EV to EBITDA (versus current 4.2). Over the last two years, lab transactions have occurred at an EV-to-sales multiple of around 1 to 2 times sales and for more esoteric labs closer to 2 to 3 times or more.
• While we acknowledge there is a lot of noise around this name, we believe this company is worth significantly more for the reasons discussed above. Moreover, we believe management could make changes over the next year to bolster confidence in its financial controls, perhaps a relationship with a Big Four auditor. Given our view that Bio-Reference Labs is a viable, growth business, over the long term we believe the stock should reflect a value closer to historical value ranges (e.g., 1.0 to 1.5 times revenue).