Bear markets give investors the opportunity to load up on values, but the opportunity comes with a catch. Do you buy great companies, which often trade at a premium, that now trade at okay valuations? Or do you buy the okay companies that end up trading at exceptionally attractive valuations?
It's the sort of dilemma that can drive an investor crazy - and for those of us who've been in the market awhile, that's a short enough drive as it is.
Neither Fish Nor Foul
Invitrogen (Nasdaq:IVGN) is the sort of stock that I want to like. It's a pick-and-shovel play on the life sciences and drug development market. It doesn't matter whether you look at a university laboratory, an established drug giant like Merck (NYSE:MRK) or a biotech like Gilead Sciences (Nasdaq:GILD) - they all use reagents, cell culture media and various other materials in diagnostics and in molecular and cell biology research. Of course, they don't necessarily use only Invitrogen's products, as rivals like Agilent Technologies (NYSE:A), Roche (OTC:RHHBY) and Gen-Probe (Nasdaq:GPRO) don't just concede these high-margin business niches. (Interested in drug stocks? Then don't miss Measuring The Medicine Makers.)
So, What's Not To Like?
Invitrogen's recent quarterly financial performance appeared pretty solid with revenue growth of 15%, organic revenue growth of about 10% and better gross margins. Unfortunately, due at least in part to several acquisitions (and the resulting goodwill), Invitrogen's return on capital is not especially strong. That doesn't make Invitrogen a bad company per se, nor does it preclude this stock from outperforming over the long haul, but investors have to be cognizant of the risks and costs of the growth-by-acquisition strategy.
What's the ROI on ABI?
Applied Biosystems (NYSE:ABI) is the latest target of Invitrogen, and this one isn't coming cheap. After the deal, the company will have about $3.6 billion in debt ($2.4 billion of that is new LIBOR-based debt that the company hopes to move to fixed rates after closing). ABI also brings with it formidable competitors Thermo Fisher (NYSE:TMO) and Waters (NYSE:WAT).
R&D Is The Key
Cost-cutting is the name of the game in the pharmaceutical industry these days, with firms ranging from GlaxoSmithKline (NYSE:GSK) to Pfizer (NYSE:PFE) to Wyeth (NYSE:WYE) using it to improve their numbers. While some of those cuts have come from corporate overhead and marketing efforts, some cuts have been in research as well. This hasn't turned into an industry-wide problem for life science product companies yet, but the fact remains that Invitrogen needs healthy R&D budgets across the spectrum of industry, academia and government-funded labs to maximize growth. (For more reading about R&D, check out Buying Into R&D).
The Bottom Line
Invitrogen fits squarely into that dilemma of the "pretty good" company that I mentioned earlier. Certainly better companies are out there, but Invitrogen is no slouch and its valuation is appealing. I'll grant that this is a tepid recommendation, but I need to see those returns on capital improve before I can muster much more enthusiasm.
