Bio-Techne (TECH) Headquartered in Minneapolis, Minnesota
Bio-Techne, founded in 1976, is a relatively small, innovative bio-technology company focused on life science research and development, product manufacturing, and services. Bio-Techne empowers researchers in life sciences and clinical/diagnostics by providing high-quality reagents, instruments, custom manufacturing, and testing services to clients in global markets. The company has created a solid foundation for a sustainable future with deep scientific expertise and relevant scientific business experience. We have followed Bio-Techne closely since the late 1990s and Alpha has owned the stock for twelve of the past twenty years.
We have high conviction in Bio-Techne’s outlook. The company enjoys a reputation for the highest product quality and consistency in its core Protein and Antibodies portfolio. These characteristics enable pricing leadership in a marketplace where costs related to switching suppliers due to subpar proteins or antibodies are high. Other competitive advantages include a strong management team, a corporate culture that empowers and energizes the workforce leading to robust research and development and manufacturing productivity, high gross and operating margins, strong free cash flow, and an unlevered balance sheet. Bio-Techne has more than 350,000 products, 2,300 employees including 140 PHDs, and a large consumables business that accounts for 82% of total revenues. Instruments comprise 10% of revenues; services and royalties are the remaining 8%. The client base is research oriented. Pharma/biotech companies account for 38% of revenues, academia 23%, OEM 22%, and distributors 17%. By geography, 57% of revenues are in the Americas, 25% EMEA, and 18% are in Asia. Techne spends about 8.5% of revenues on research and development.
Bio-Techne’s sales and adjusted earnings have grown in the low double-digits during the past two decades; we expect the company to report revenues of approximately $890 million in the fiscal year ending June 30th, 2021. It is a very profitable enterprise. The company has no net debt, and its free cash flow generation this fiscal year should approximate 24% of revenues, exceeding net income by a wide margin. FCF has doubled during the past five years. Bio-Techne’s strong financial position enables management to invest in plant and equipment, research and development, and mergers and acquisitions as needed to strengthen the company’s competitive position and generate future growth. The company reports financially in the two business segments displayed below: Protein Sciences (75% of revenues and 90% of profits); and Diagnostics and Genomics (25% and 10%, respectively) as follows:
In the fiscal year ending June 2020, Bio-Techne was on the way to 10% organic revenue and double-digit earnings growth when the COVID-19 pandemic struck. The pandemic shuttered most of the company’s academic market and urology centers—accounting for over 30% of total revenues—for months. Management successfully pivoted a portion of the company’s research and development and manufacturing resources to COVID-19 solutions. Despite a very difficult third quarter, during which organic revenues plummeted 8%, Bio-Techne ended the June fiscal year with 4% revenue growth and an increase of 1% in adjusted earnings. In addition to COVID-19 solutions, the company improved performance in Protein Sciences and Diagnostics and Genomics, aided by 24% growth in China. This resilience is a testament to the company’s competitive strengths and its sustainable business model.
At the beginning of the current fiscal year, ending this June 30th, management expressed high expectations that life science research funding will not only recover but increase, given the pressure of planning for future pandemics. Thus, with earning per share gains of 35% and 50% in the September and December 2020 quarters, Bio-Techne’s stock moved sharply higher. During this turbulent period, Bio-Techne launched 283 new proteins, 1,594 new antibodies, and 59 new assays, adding significantly to its Protein Sciences and Diagnostic and Genomics segments product offerings.
Recently, management has been implementing a strategy to accelerate growth by acquiring businesses and product portfolios that leverage and diversify existing product lines, fill portfolio gaps with differentiated high growth businesses, and expand geographic scope. Whether Bio-Techne can keep up with its valuation will be largely determined by management’s success in developing new bio-technology products, testing equipment, and services for the life-science industry. As long-term investors we continually seek to find the optimum balance between risk and reward in the portfolio.
Since January 2016, when the present holding was purchased, Bio-Techne’s stock has gained 360%—equivalent to a compound annual return of 29%! This performance compares to a 14% compound annual return for the S&P 500 during the same five-year period. We purchased the present holding at $81 per share. Relative to 2022’s fiscal year earnings estimate of $7.00 per share, this price represents a very low multiple of earnings, for a P/E of roughly 12-times. Since the stock has appreciated about 500% during the past five years, presently trading at $400 per share, the P/E multiple on next year’s earnings is about 56-times. We are not comfortable with valuations that seem disproportionately elevated and have sold some stock periodically over the past five years, to reduce the holding. As with other long-term holdings with stretched valuations, we periodically apply hedges to Bio-Techne to manage overall portfolio risk.
Bio-Techne remains one of Alpha’s top positions because the shares have appreciated so much over the years. Most of Alpha’s holdings sell at more conservative valuations. We believe Bio-Techne deserves a premium valuation given its competitive advantages, successful history, and outstanding opportunity for future growth. Success stories like these bolster our conviction that life sciences research funding will continue to grow and that Bio-Techne’s revenues will grow substantially in the next five years.
Martin Marietta Materials (MLM) Headquartered in Raleigh, NC
Martin Marietta Materials is a leading supplier of building materials, including aggregates, asphalt, cement, ready mixed concrete, magnesia, and dolomitic lime. Aggregates are crushed stone, sand, and gravel used in construction and infrastructure build and repair. With more than 100 years of high-quality aggregate reserves, Martin Marietta has a network of operations spanning 27 U.S. states, Canada, and the Bahamas, and owns over 300 quarries, mines, and yards. Alpha invests in Marietta for the crucial role it plays in enabling the solid foundations—of homes, highways, corporate centers, and industrial facilities—that enable the U.S. to thrive. Government infrastructure spending has played an important role for decades, and the proposed $2 trillion infrastructure stimulus package, currently under discussion in Congress, will have a very positive impact, even if total spending ends at 50% of proposed levels.
In February, we attended the company’s investor day. Management made excellent use of the virtual format due to the global pandemic and presented its strategic plan and Strategic Operating Analysis and Review. The lead executive from each regional headquarters in the U.S. provided a discussion of local business. The meetings highlighted the company’s creative flair, unique set of construction materials assets, and safety and profit-focused mindset. Senior management emphasized the company’s pricing power for its products. In many cases, the cost of transporting rock and stone over long distances limits or prohibits competition. Since 2005, the average price per ton for the company’s aggregates has increased at an impressive 4.5% rate from $7.58 to $14.77. This has occurred during a period of relatively low inflation. In a higher inflationary environment—which is likely in the next five to ten years—Martin Marietta’s pricing power will also be higher.
The company has a disciplined and rigorous business culture, which is critical in the construction industry. Martin Marietta has just achieved its best safety performance in its history—25% better than the world-class safety level for industrial corporations. Chairman, President, and CEO Ward Nye leads the management team and our meetings with him stretch back 15 years. He is a lawyer by training. His critical thinking skills have helped lead a series of successful strategic acquisitions and divestitures that have enabled the company to grow revenues at over 10% annually for the past ten years, while doubling operating profit margins. The stock has doubled since our initial write-up of the company in the fourth quarter of 2018. We continue to see strong long-term opportunity. The day spent with management in February reinforced our views of the business and we expect Martin Marietta to remain a major position during this next year while we await news on the U.S. stimulus package for infrastructure.