Bio-Reference Laboratories (BRLI) was ranked tier 1 in a recent stock screen for companies that exhibited steady, predictable, growth with little debt. As part of the value investing workflow we developed in an earlier article, a detailed analysis must now be conducted, followed by a determination of BRLI’s intrinsic value.
Bio-Reference Laboratories is a company which provides clinical testing services to customers primarily in the Northeastern United States. The customer base includes physician offices, clinics, hospitals, employers and the government, and it is the fourth-largest testing services provider in the country. In addition to standard tests, Bio-Reference Laboratories has great expertise in cancer pathology through its GenPath unit. Also of note is the GeneDx genetics laboratory, which is a leading provider in the diagnosis of rare genetic diseases.
BRLI has enjoyed an extremely long run of phenomenal growth – over 19 years now at a compound annual growth rate in excess of 20%. The company is a full service provider of medical testing services but specializes in oncology, genetics, and women’s health. The genetics division, GeneDx has shown strong growth in of itself, but the real strength comes from how knowledge gained in genetics is supporting growth in its other divisions. Following are some of the highlights from the most recent quarterly and annual reports:
- Bio-Reference Laboratories now processes in excess of 6.7 million laboratory test requisitions per year, serviced by a network of 98 patient service centers located in the Northeastern region.
- Approximately 40% of testing services provided are routine tests, with esoteric testing making up the remaining 60%. Esoteric testing is generally priced higher than routine tests.
- No single client accounts for more than 10% of net revenues.
- The company is currently involved in a stock buyback plan of 1,000,000 shares. Approximately 285,000 shares have been repurchased to date.
- BRLI is a leader in connectivity through its CareEvolve program which is currently in use at 200 locations around the country to connect hospital-based pathologists together through StormPath, a virtual pathology system.
- During the most recent quarterly conference call, CEO Dr. Marc Grodman offered guidance that revenue is expected to increase 15% and earnings are expected to increase 20% for the coming year.
- One of the company’s major strengths is it’s large (and aggressive) marketing group. BRLI has in excess of 250 account managers and marketing professionals on staff, which allow the company to promote its branded testing services against larger, more established firms very effectively.
- Two primary competitors are Quest Diagnostics (DGX) and Laboratory Corporation of America (LH). BRLI is much smaller than these national service providers.
- The company does not foresee the payment of dividends on its common stock at any time in the near future.
- Red flag: There is pressure on BRLI (along with most other medical testing companies) to reduce billing rates, which could adversely affect revenue in the future. The company has issued statements that the effect is expected to be minimal and that future growth through innovation will more than offset and reduction in reimbursement rates, however this is something to keep an eye on.
BRLI has been extremely consistent in achieving strong, predictable growth over the past two decades. Based on the information available it does not appear that this will change in the near term, the only caveat being the red flag identified above with respect to pressure to reduce reimbursement rates. BRLI has enjoyed a 25% CAGR on EPS over the past five years and a 23% CAGR on sales. Current market capitalization is approximately $798m based on the recent closing price of $28.80 per share. BRLI has only 18m in long term debt, resulting in a very low debt/equity ratio of 0.08.
Based on a detailed review of the information available, it appears that BRLI meets the intent of our PGLD stock screen and is worthy of further analysis. The next step will be to determine an estimate of the stock’s intrinsic value and target entry price.
Determining the Intrinsic Value
We will use the EPS Growth Capitalization method to determine a present day intrinsic value for Bio-Reference Laboratories. Be sure to check out the complete guide to this technique.
Analyst consensus is that Bio-Reference Laboratories will grow at a rate of 17.5% per year over the next five years. Based on the fact that EPS grew at a compounded rate of 25% over the past five years, grew a whopping 37% last year, and the guidance from the company’s CEO that growth will continue at a 20% rate, I believe the analyst estimate is too low. I am going to opt for a more realistic, yet less conservative estimate of 20% annually for our intrinsic value calculations. This is also supported by phenomenal sales and equity compound growth of 23% and 21% respectively over the past five years.
BRLI’s average annual PE ratio has ranged over the past ten years from a low of 13.6 in 2003 to a high of 26.5 in 2007. The overall average PE over the past five years was 21.4 and over the past 10 years was 21.1. As of today’s close, the PE ratio was 19.07. Based on historical data and expected growth rate going forward, I believe a future PE of 21 is realistic, and will be used in the intrinsic value calculation.
Summary of all inputs to the calculation:
- Future EPS growth: 20% (estimated)
- Future PE ratio: 21 (estimated)
- Current EPS (ttm): $1.51
- MARR: 15%
- Timeframe: 5 years
Based on a compound growth rate of 20%, the future value calculation results in a predicted EPS of $3.76 in five years time. If BRLI were to trade at a PE ratio of 21, this would equate to a share price of $78.90. To achieve our minimum acceptable rate of return of 15%, the present value of the stock and hence our intrinsic value equates to $39.23 per share.
A margin of safety must be applied to the intrinsic value to account for any errors in our estimation, and should be based on the confidence level we have in the predictions. The estimated values we’ve used thus far have been realistic. Let’s have a look again and choose some more conservative numbers to see how that affects the intrinsic value. Let’s try a PE of 17 which is only marginally lower from where it’s trading today, and let’s also assume that the analysts are correct and EPS growth slows to the 17.5% they are predicting. Running the numbers again results in a lower intrinsic value of $31.95 per share, which represents a 27% discount to the original intrinsic value of $39.23. Therefore, a 30% margin of safety should protect us from the uncertainty in our calculations, which results in a target entry price of $27.46.
Bio-Reference Laboratories, Inc. will be added to the stockodo watch list with a target entry price of $27.46 based on an intrinsic value of $39.23 and 30% margin of safety.