Description

Mesa Laboratories trades at a 13.6% free cash flow to enterprise value yield, 6.76 EBIT/EV, has improved earnings seven out of the last eight years, is buying back another 10% of its stock and just announced its first cash dividend. On a FCF to market cap basis, MLAB yields 10.65%, and on an earnings basis it trades at a 9.7% cap. rate (10.8 EV/E). Current assets are $10.1M, of which 60% is cash, while liabilities are $0.5M for a current ratio of a bit more than 20:1.

Mesa Labs develops, manufactures and markets measurement instruments used by industrial and hemodialysis customers. The products include pipeline flow meters, instruments for calibrating hemodialysis, and other sensors and recorders.

Mesa Labs originally went public in 1984, and for at least the last eight years, has been a model of consistency. The earnings are straightforward (no pro-forma, extraordinary item stuff), and have been increasing on a per share basis due to their steady share buybacks. The CEO owns 11.4% of MLAB, and the business has demonstrated steady earnings growth and maintained a very strong cash balance sheet—their cash grew by 25% in the previous quarter, from $4.8M to $6.0M.

FCF/share is $0.98 for the last four quarters, while earnings have been $0.67. Using figures from the last six months, R&D costs have been on pace to represent about $0.10 per share, having been about 3.3% of revenues. Development projects for the company’s line of Dialysate Meters for kidney dialysis have begun, and MLAB will be able to introduce their next generation medical instruments in the next fiscal year. In addition, there are three new versions of their Micropack III temperature loggers in the works—the current product, according to their claims, is by far the smallest and least intrusive temperature monitors on the market. Anyway, they do look pretty slick, so all appears adequate on the R&D front.

Their largest variation within expense categories is commision costs, which have trended higher due to higher sales volume.

I don’t pretend to be an expert on their products, but they seem to have quite a few bright spots. Their temperature logging products increased 40% over the previous year, following the rollout of the aforementioned Micropack III temperature logger. Humidity logging products increased 140%, and their Datatrace product line increased 28%. These bright spots were offset by a decline in some Dialysis products, which were partially distorted due to a large single order in the 2002. Interestingly, at they same time they were hitting record earnings in 2002, MLAB reduced some of their permanent staffing and outsourced via consulting contracts some specific project work. These consulting costs are now gone, and the company has retained the lower overhead base.

Share buybacks:

The company has a program to repurchase up to 300,000 shares (10%) of its outstanding common stock. These will be used to grant ridiculously low priced options to family members that are padding the payroll. Just kidding—that is so bubble era. Actually, the company has stated that the shares purchased will be canceled and repurchases will be made with existing cash reserves.

This is another company that would benefit from simply going private. It is listed on the Nasdaq, and seems to have no need for raising capital, and hasn’t had for a decade (which is as far as my data goes back). Each $100,000 they could save in auditing and filling costs is worth another several cents in earnings, and if we just go with the assumption of a $300,000 savings, that would boost earnings by $0.10, and imply an adjusted EBIT/EV ratio of 6.2. Of course, it probably won’t, but the valuation is compelling enough that the stock should do fine regardless.

Catalyst

Compelling valuation, ongoing share buybacks, initiation of a regular dividend, and the increasingly present theme of going private to reduce Sarbanes-Oxley related costs.