|Shares Out. (in M):||4||P/E||61||61|
|Market Cap (in $M):||552||P/FCF||30||30|
|Net Debt (in $M):||55||EBIT||14||14|
|Borrow Cost:||General Collateral|
Mesa Labs (MLAB) is a sleepy but highly overvalued company.
They have 4 segments, but only 2 really matter. The first is sterilization equipment for hospitals (including reagents that are used to assure that sterility is preserved) and the second is instruments used for quality control processes in food and healthcare. Both of these are reasonable businesses but don’t appear to be growing (all are flat for the last 4 quarters, despite acquisitions in that timeframe). I believe this is a combination of competition and pricing pressure, as gross margin has also come under significant pressure in the last quarter. Note that they do not break out organic growth without acquisitions, and while recent acquisitions are all small enough to be non-material, in aggregate they surely are.
It has been pursuing a failed roll-up strategy, as evidenced by poor organic growth and declining ROE, ROA, and ROIC over the last 5 years.
Moreover, while its organic growth should average 2-5%, depending on the division (the CFO actually told me that “there isn’t a lot of room for growth”), it has gone negative for 3 of the 4 divisions in the last few quarters, and the last division is likely to flatten out this quarter based on a tough comp. This growth may also be flattered by various games played with acquisition accounting, as the company does not provide full transparency around many, small acquisitions.
Other assorted issues are:
1) Heavy use of contingent payments in acquisitions, which historically have helped reported results when reversed (though, not in the last few years)
2) Small local auditor (EKS&H LLP)—paid $300k total in 2017, of which $1,000 was for acquisition related audit services
3) Terrible Glassdoor reviews (1.7 stars average)
4) Decent amount of insider selling
5) F4Q18 (March) should miss the single sell-side estimate on the top-line, though earnings should be OK (they exclude a bunch of expenses so they can probably make the number somehow)
And all this can be yours for only 45x EBIT! That’s not a typo.
mkt cap 554.8
p/'18 eps 60.8
The bull case seems to be that they can acquire more small companies at 7x EBITDA and manufacture 10-15% growth over time. The company will admit that this is getting more difficult, as multiples have increased over time. Also, while they can add a turn of debt, their $20m of FCF won’t be enough to fund this growth and they will need to issue equity. As discussed above, since their track record of M&A seems to be pretty poor, perhaps investors should actually apply a negative platform value here.
My target here is $37—15x their cashflow in 2010 plus what they have paid for acquisitions since then.