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Published: September 13, 2010
When a company is in a field with a lot of
competition, the key to success is to differentiate the product.
People without a lot of investment experience may not see
differences between companies in a given sector, but differences
exist if one looks closely enough. Although these differences
may seem small or subtle, they can make the difference between a
company that just chugs along, and one experiencing rapid
growth.
Those differences come down to which company has the more
visionary management. As a private equity investor once told me,
you don't invest in companies -- you invest in people.
People, especially the CEO, are what make the difference at
Bio-Reference Laboratories (Nasdaq: BRLI). The company is
led by Marc Grodman, who also happens to be the Chairman and
President. His vision differs from competitors like
Laboratory Corp (NYSE: LH) and big-time player Quest
Diagnostics (NYSE: DGX), in that he stands steadfastly by
his philosophy that top-notch service and science is why doctors
should use his company instead of the others.
Mr. Grodman decided to focus on services that other competitors
don't, and that's where product differentiation enters the
picture. Medicine can get mighty complex, and doctors can demand
some very esoteric tests. That's exactly the name Bio-Reference
uses for the diagnostic work the company's 10-K filing
identifies as tests in the areas of endocrinology, genetics,
immunology, microbiology, oncology, serology and toxicology. And
it's more than a high-margin business. It's also growing very
quickly because of three secular trends: 1) People's generalized
fear of cancer, 2) doctors ordering every test under the sun to
avoid malpractice claims, and 3) just plain old improving
technology.
Grodman also decided to focus the company's routine diagnostic
testing services in the New York and New Jersey markets
exclusively. This allows the company to tailor its sales for one
specific region, hunting for competitive advantages and
exploiting them. As a smaller operation with this kind of focus,
it allows for more customized service that is more responsive
and has fewer layers of staff. The company doesn't need to
expand beyond its current region for the near future. Centered
as it is in the massive metro area of New York City, there's
plenty of
market share to seize from other competitors. And as the
numbers show, it's working.
These esoteric tests now account for more
than 53% of the company's revenue, compared to 48% last year.
Meanwhile, the company has quietly grown revenue by +20% every
single year since 1995.
Earnings are expected to rise +22% this year and next. By
that point, Bio-Reference will be generating $500 million in
revenue, and still have plenty of room to grow -- since Quest
has $7.5 billion in revenue. There's plenty of market share
available to grab, and +20% revenue growth each year suggests
Bio-Reference is earning converts.
Testing Bio-Reference's financials yields a clean bill of
health. The company has $17 million in cash, only $8 million in
long-term debt, and its annual interest expense of $1.5
million is easily covered by its $38 million in EBITDA.
Of course, prudent investors should always take a peek at risks.
With competition coming in the form of giants like Quest,
Bio-Reference must continue to grow. That means getting more
doctors on board for its esoteric testing, and opening up new
markets for regular testing. The other dicey factor is that 23%
of the company's revenue comes from Medicare reimbursements.
There's no clear picture about how it will be affected by the
new health care reform law. However, since esoteric testing
generally isn't covered by Medicare, a continued focus on
growing that higher-margin division would kill two birds with
one stone.
Action to Take -->
Bio-Reference Laboratories is a classic small-cap growth play.
It's the scrappy runt of the litter, with a clear company
mission, strong financials and impressive sustained growth. Its
products are different from the competition, it has a high
barrier to entry and visionary management. Given the company's
track record of growth and the secular trends, I am very
comfortable putting a multiple of 22 on earnings and carrying
that out eight years. That would give the company $3.08 in
earnings per share in 2017, for a stock price of $68 -- a +240%
return from today's prices.
-- Melvin Halcomb
Contributor
StreetAuthority |
