BioMerieux reported full-year results that fell shy of expectations on Wednesday, as solid product sales were more than offset by increased expenses, a higher-than expected tax rate, and the impact of recent acquisitions.
Our narrow moat rating remains intact but we plan to lower our fair value estimate modestly to reflect lower-thananticipated earnings potential over the next several years. Longer term, we remain confident that the company’s strong defensive business model, increasing exposure to high growth markets, and leading share in healthy end markets will pave the way for accelerated growth. However, intense competitive pressure and continued macroeconomic difficulties are unresolved issues, rendering bioMerieux shares fairly valued in our opinion.
Overall, bioMerieux ended 2012 on a slightly disappointing note. As previously reported, full-year net sales increased 10% year over year to $1.57 billion through solid growth across most key product lines. As expected, the clinical microbiology division was a standout performer, with 9% growth from the prior year fueled by new product introductions and solid demand.
Encouragingly, the industrial microbiology unit also exceeded our internal targets as sales rose 28% from the prior-year period. The rest of the clinical applications segment was similarly sound, driven by robust international expansion, contributions from recent acquisitions, and product launches. sSles from emerging markets also increased 17% year over year and now comprise nearly 30% of consolidated revenue.
However, investors were disappointed by the company’s operational performance, as both gross and operating margins compressed compared with the prior year. Higher cost of goods sold, pricing pressure within emerging markets, unfavorable currency headwinds, and losses from previous acquisitions weighed on results. Steady margin improvement during the next five years is expected, although we forecast the pace of expansion to be fairly modest amid continued international expansion and enhanced research and development investments.
Combined, earnings per share fell 15% to $3.41, significantly below the consensus estimate. Potential growth drivers should include continuing high demand from emerging markets, stronger penetration into the United States, additional new product introductions, and contributions from recent acquisitions. The company’s significant investments in R&D should also help drive revenue.
However, a weak macroeconomic environment and restricted capital spending globally are notable challenges. In particular, bioMerieux may face steeper-thananticipated headwinds due to its European exposure (more than 50% of sales are generated in Europe; roughly 10% of revenue is derived from Southern Europe). Furthermore, as bioMerieux continues to branch into other industries, it remains to be seen whether it will ultimately establish a solid customer base against powerful opponents, pricing pressure, and emerging technology.
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