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Bull of the Day: Mesa Laboratories (MLAB)

Key M&A boosts sales & EPS, opens path to new business with Clinical Genomics Division

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This story originally appeared on Zacks

Mesa Labs MLAB is a $1.6 billion provider of quality control monitoring and validation instruments serving niche markets in healthcare, industrial, pharmaceutical, medical and food processing applications.



The Zacks Rank first put MLAB on my radar in 2018 at $185. At the time in my Healthcare Innovators portfolio, we took a quick swing trade out of the shares back to its old highs of $225.



And the stock has provided plenty of trading opportunities since then, with over half a dozen swings between $200 and $270 as investors and analysts (myself included) had their doubts about whether the small-cap should trade for over 10 times sales.



Now, MLAB is back in the upper realms of the Zacks Rank after analysts raised estimates to account for a key acquisition that will allow expansion into a critical new healthcare arena. This deal has also vaulted shares to new highs above $300.



MLAB Adds a Clinical Genomics Division



On September 14, Mesa Laboratories announced that it has entered into a definitive agreement to acquire Agena Bioscience for a cash purchase price of $300 million. Headquartered in San Diego, Agena is a leading molecular diagnostics tools company that develops, manufactures, and supplies highly sensitive, low-cost, high-throughput, genetic analysis solutions to clinical labs and development partners globally.



Peter Dansky, CEO of Agena, will join Mesa to lead the new Clinical Genomics Division.



Excluding the impact of COVID-19 related revenues, Agena is expected to add between $63 million to $67 million of revenues -- about a 50% increase -- during the first 12 months of ownership, deliver high single digit organic revenues growth over the next several years and excluding the impact of purchase accounting, generate gross profit percentages in the mid to high 60's.



Additionally, excluding the impact of COVID-19 related revenues, purchase accounting and integration expenses, Mesa expects adjusted operating income as a percentage of revenues to approach 20% for the same first 12 months of ownership.



One Analyst Who Saw the Potential



A year ago in September, after a weak quarterly report and downward guidance, here's what I wrote about Mesa Labs...



Despite this outlook, investors are not running away from MLAB shares, even after a $135 million secondary offering in June. Mesa priced 600,000 shares at $225 on June 9 and the deal size was increased from $100M to $135M and priced below the last close of $236. Jefferies, JPMorgan and Evercore ISI are acting as joint book running managers for the offering.



In a September 1 model update from Jefferies, analyst Brandon Couillard and his team wrote about MLAB as "a high-quality small-cap compounder with a defensive growth profile that is relatively insulated from the macro."



The analysts noted that while near-term demand conditions had been impacted by the pandemic, they continue to believe that improved execution under new management, who are former Danaher DHR executives, would offer new stability and organic growth opportunities.



And with over $200 million of cash on hand, they also like the possibility of additional M&A as a likely catalyst for the stock. They maintained their $290 PT.



(end of September 2021 article excerpt)



The Jefferies team nailed the potential of this small-cap. While I don't have an updated report from them, I do have this like-minded view from KeyBanc...



Former Danaher executive Gary Owens, who was head of Genomics and now CEO of Mesa Labs, announced the acquisition of Agena Biosciences. Agena is significantly non-GAAP EPS accretive, increases overall growth of Mesa, and like most diversified LST companies establishes a diagnostic platform.

- Zacks

We increase our FY23 EPS from $5.54 to $7.60 and estimate a blended organic growth rate 200-300 bps above the prior pace of 4-6%. Using a new sum-of-the-parts model, we raise our Fair Value from $300 to $330 per share.



The Expanding World of Genetic Diagnostics



One of the most exciting areas of medicine right now involves companies offering innovative genomics and testing solutions for doctors, scientists, and clinical lab services. I own three such companies, all with different niches: Invitae NVTA, Natera NTRA, and Pacific Biosciences PACB.



It looks like Mesa Labs' recent expansion will offer them more opportunities to serve companies like these.



Disclosure: I own NVTA, PACB, and NTRA shares for the Zacks Healthcare Innovators portfolio.



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