Explosive growth as easy as ABC
Posted on January 30, 2008 by Richard Beddard
Filed Under Companies |
Could Abcam (ABC) be that stock? Before I explain what it does. Here’s how I discovered it.
I’m interested in companies on the extremes, particularly stocks with extremely low prices relative to their average earnings levels. It occurred to me, that I could equally well look at the other extreme, at companies with extremely high PE ratios.
The market isn’t shunning such companies, it’s feting them. Their prices are high relative to past earnings, partly because of demand for the shares, and partly because profit has grown so fast the profits from earlier years are diminutive by comparison.
By selecting stocks with explosive earnings growth, high expectations, and prices moving generally from the bottom left corner of the chart to top right, I hope to identify momentum stocks; stocks that investors are buying and are likely to go on buying so long as the earnings keep growing.
Abcam fits that description. Its price is 50 times its earnings averaged over five years, and over those five years it has grown at 51% a year, though it’s probably growing at about half that rate now. Since it floated in November 2005 its price has risen fairly directly from 182.5p to 334p .
I can find this information quickly because I have it in a spreadsheet, with all companies that have dodgy cash flows, earnings and excessive levels of debt removed. So, the indications are Abcam is:
- a momentum stock, that is…
- financially sound.
So what’s the story? And does it back up the numbers?
Abcam sells antibodies to scientists in laboratories at universities, hospitals and pharmaceutical companies. Typically, they’re using them to study cells on research projects relating to diseases, or the human genome for example. The labs of the world are far removed from the storms blowing across the High Street, which perhaps explains some of Abcam’s resilience.
Although it’s a global growth market, it’s also a market Abcam can grow in. There are hundreds of competing antibody companies listed here and here, but Abcam says (in its 2005 prospectus) no one company accounted for more than 15% of the US market, its biggest, which was worth $1.7 billion dollars then.
So, my theory is Abcam’s growing fast because it’s better at selling antibodies than its rivals. Apart from its growth rate, Abcam’s pre-tax profit margin and return on assets suggest it is in a strong position. If it weren’t it would have to reduce prices, thereby reducing profitability.
Its advantage is its website. Visiting the site is a comical experience, because Abcam sounds like a serious scientific enterprise and it is, of course. It was born in a lab at Cambridge University, it employs 32 PhDs and it manufactures a growing proportion of the antibodies (6%) it sells.
But it’s also a shop. It has an Abpromise (I’m pleased to say it’s not a price promise), customers earn Abpoints, and benefit from special offers. At the heart of it is a growing catalogue of 41,000 antibodies with customer ratings and reviews (Abreviews!).
If this sounds familiar, it should. Abcam is trying to ‘do an Amazon‘ and take a huge chunk of the online antibody market in the same way the upstart Internet company became a retailing giant. It sounds funny to me because I don’t think of antibodies like books. But they’re a basic resource for a biochemist.
Though a website might not seem like a sustainable advantage, it’s the community of researchers and Abcam’s close ties with them that competitors will find hardest to copy. While many antibody companies have online ’supermarkets’, I didn’t find any networking with scientists this way*1. Abcam seems slicker, and competitors with large sales forces might envy the low costs of a recent start-up that does most of its selling by Internet.
Abcam’s finance director, Jeff Iliffe, describes its datasheets and Abreviews as the “essence” of Abcam because there’s a lot more at stake when you’re buying antibodies than books. Two seemingly interchangeable antibodies can behave very differently in practice and the more information a scientist has, the more confident he can be that he’s buying the right one.
Then there’s the company’s dividend policy. Despite its relative youth and growth aspirations, it can afford to pay out 25% of earnings as dividends. In 2007 it paid out 33%.
Apart from the competition, the main risk is the mother of all risks (to a value investor, like me). The price is so high, there’s so much expectation built into it, that should the company’s growth slow significantly, the price momentum won’t just slow, it’ll collapse.
So what’s an investor supposed to do? I think there are at least three possible approaches to Abcam:
- The cynical, short-termist might buy, and place a trailing stop loss of, say 20%, gambling on the momentum continuing long enough to profit.
- The loyal long-termist might buy and hold, confident that no matter what happens along the way Abcam will one day be a much bigger and still very profitable company.
- The cowardly opportunist might watch, and wait for a setback, and the chance to buy at a much lower price.
The cynic risks triggering his stop-loss on a short-term dip in form, and missing the Next Big Thing. The loyalist risks selling out at a much lower price if his vision doesn’t materialise (for a much greater reward if he’s right). And the coward, well he might never own Abcam shares at all.
By nature I’m a coward, but on this occasion I’m slinking away with a tinge of regret :-).
footnotes:
- See: Beckman-Coulter, Becton Dickinson, Calbiochem, Cell Signaling Technology, DakoCytomation, Invitrogen, Jackson Immuno-Research, Millipore, Promega, Santa Cruz Biotechnology, Sigma Aldrich, US Biological.
- Abcam is, of course, coming soon on iBall.
Comments
10 Responses to “Explosive growth as easy as ABC”
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Is there basic scientific research as good as their adverising and promotional gimmicks?
It’s a good question and I think the answer falls into two parts. Is its basic scientific research good? And is the promotion a gimmick?
The first question is difficult for a non-scientist to answer conclusively except to say that the company stresses the quality as well as the size of its catalogue (and the number of PhDs it employs) and it seems to be serious about its science: http://www.abcam.com/index.html?pageconfig=tradeshow
The basis of my blog is that the website (I assume that’s what you mean by advertising and promotion) isn’t a gimmick but a major factor differentiating its business.
Its revenues are evidence that its science or at least its product (the 41,000 antibodies mostly) is good. No?
Thanks for this. But you still remain a “coward” to quote you? Why?
I’m puzzled.
Hi Martin. Now you’ve opened the flood gates
There are two things I need to be satisfied about before I buy. The first is the company, and whether it’s any good. The second is the price. And whether it’s cheap.
So I think Abcam’s a good company. But it’s price earnings ratio is in the mid-twenties (from memory). So it isn’t cheap. There’s a good reason for that - investors expect it to grow fast and one day today’s price will look very cheap.
Fair enough, that’s one way to look at it. It’s not my way, though. I don’t think about whether the price is going to go up or down, or how much profits are likely to increase in years to come.
I look to buy a company when its shares seem cheap right now relative to its earning power or (less commonly) its assets. I try to establish whether there are any credible threats to its viability, and if I can’t see any I buy on the basis that whatever’s depressing the price and causing other investors to sell will ultimately go away.
So I think what you’re asking, in a roundabout way, is does my cowardice betray a lack of confidence in the company? And the answer is no, not really (though please understand I know as much about antibodies as Jerome Kerviel appears to know about risk management).
What it betrays is lack of confidence in the price. That is, it’s possible that investors are so enthused they’re overpaying for the share. I prefer the opposite scenario, where it’s possible that investors are so dismayed they’re overselling a share, and the price is unreasonably low.
So why write about Abcam? Well, there are three reasons. First - it’s my job, and if I only stuck to one kind of share I wouldn’t be doing it very well. Second - I’m always trying to find new ways to identify companies I can profit from. And third - let’s say Abcam runs into temporary difficulty and the price falls. I’ve already done most of the homework.
I said cowardice, but you could equally argue it takes courage to buy shares when the price is falling - the courage of your own conviction. Or you could say it’s foolhardy. It all depends on your perception of how markets (i.e. groups of people buying and selling shares) behave.
None of this is intended as advice. Hopefully its obvious that I don’t believe it’s possible to say a share is a ‘buy’ or a ’sell’ without understanding the individual buyer’s psyche.
I have trouble enough understanding my own, let alone other peoples’!
Sorry about the essay. All the best, and good luck.
Don’t forget that ABC have built a new HTP ( High-throughput production laboratory ) which is now operational. ABC will produce its own antibodies there and these will result in much higher margins ( as if the current margins aren’t great enough ). Abcam expects 50% of Abcam branded products to be produced there by 2012.
ABC also has openend a Japanese office in December 2006 giving access to one of the fastest growing antibody markets in the world.
I am definitely not a scientist ( I am a full time investor and sometimes…err….speculator ) however the way that I could understand this company was to think of the antibodies like a product ( as in the Amazon example in the article ). The problem that I have now though is that I am not 100% familiar with pricing flexability etc however increased margins on top of already exceptional margins ( from HTP production ) should lead to greater pricing flexability should more competition appear.
I am happy to hold for the next 4 or 5 years and then to revaluate. I guess I am not a coward but a loyal long termist. :O)
Hi Liarspoker,
Thanks for your thoughts. I do admire long term loyalists! And if you got in earlier you’re certainly in the black already!
Hi Richard,
The other thing which I forgot to mention was the failed take-over talks. Obviously ABC management thought that the company is worth more than the acquirers wanted to pay at the time. Perhaps, if the business and prospects go according to plan, we will see another higher offer.
I have my own thread on ADVFN which explains the business as well:
http://www.advfn.com/cmn/fbb/thread.php3?id=16051719
The thread also contains a few links which I found very useful in understanding the internal processes etc.
BTW If there’s a good dip I’ll certainly add. :O)
Liars
Hi Liars,
Thanks for the link(s). You’ve clearly done your homework. Glancing through the replies, one of them mentioned Meldex.
One thing that surprised me in looking at the two companies (see here for an introduction to some of the work I’ve done on Meldex: http://blog.iii.co.uk/all-to-play-for-at-meldex/ )is the low level of private investor interest in Abcam versus Meldex.
Obviously the prospect of profitability is more attractive than the reality of it! Perhaps its a good sign - that there’s a general lack of hysteria around Abcam.
Which comes first, the short-termist, or the cynic?
Hi Trattori. No idea. I can tell you what would probably happen afterwards though, if I tried it