Seduced by Celsis
Posted on July 13, 2009 by Richard Beddard
Filed Under Companies |
In practice:
What’s not to like?
Barring a small surge to 240p in 2007, and subsequent backwash to 140p last year, it’s difficult to detect much life in Celsis’ share price. Investors’ enthusiasm for the company seems to be flagging as it grows and in the second half of this century it’s mostly traded sideways.
Could a company as technical and, well, profitable, as Celsis find itself washed-up on the shores of bargain territory?
Yup, and I’m really not sure why.
Jay LeCoque, who became chief executive in 2001 and Christian Modrelle who joined as finance director just before, get the credit for turning Celsis around, apparently by sharpening up its accounting practices and tightening-up its relationships with customers and suppliers.
They created a bit of excitement in June 2006 when they splurged $30m on In Vitro Technologies, a company that supplies cells, especially human liver cells to researchers screening drug compounds for toxicity, but by and large investors have welcomed rising profits in five of the last six years with a collective shrug.
I don’t get too excited about predictions of rapidly growing profits, but a record of growth in a company with a low share price relative to its earnings is a good thing, especially if it’s financially strong and appears to be weathering the recession well.
Celsis’ biggest and best performing division last year was Rapid detection, which earns the company 45% of its revenues. It provides diagnostic systems, instruments and reagents, that screen raw materials and products for the pharmaceutical, dairy, food and beverage, and household product industries. The business model is is a bit ‘printer and ink’ with the consumables, the reagents, accounting for 90% of turnover.
The systems test for bacteria and other contaminants, providing results days quicker than traditional methods. That saves companies money and enables them to warn customers earlier, should a product be contaminated.
Thirty-five per-cent of revenues come from its outsourced laboratory testing service, which ensures the safety, stability and chemical composition of products, and 20% comes from In Vitro.
By closing its Development Services division for outsourced drug development, Celsis has kept the laboratory testing service profitable, saying that cost-cutting is inducing companies to outsource basic lab-work. In Vitro is also suffering, temporarily Celsis says, due to recent consolidation in the pharmaceuticals industry.
Nevertheless, the results for the year to March 31 2009 were very reassuring. Profits up for the fifth time in six years, on slightly lower turnover. The only blemish in its F_Score, which otherwise describes an increasingly profitable, less indebted company is its gross profit margin, down fractionally to 69.8%, which is still very good.
LeCoque puts the company’s performance down to its business model: focusing on higher margin businesses, reducing costs, and discontinuing less profitable businesses. That sounds like a recipe for any business and in its quiet, understated way I can’t help feeling seduced by Celsis.
The mystery is, why other investors aren’t. Maybe they’re prejudiced against a company headquartered in the US and reporting in dollars.
Or perhaps Celsis isn’t exciting enough. Admittedly it’s not growing sales in the recession. Many times it’s promised to augment its growth with acquisitions, but recently it’s only made one big one, IVT.
Its caution, or whatever is driving its unwillingness to gobble up another company, left it with more cash than debt last March though, which is comforting given the state of the economy.
Even better, whereas the ‘A’ word has featured prominently in past annual reports it just creeps in once in the chairman’s and chief executive’s letter this time.
Perhaps there’s a fundamental problem I can’t see because I don’t know about product testing.
That would be serious, say, if its technology was about to be made redundant by a rival, but there’s no sign of it in the company’s statements, or its financial performance, and while the shares cost about twelve times the nine-year average of its earnings (profits), they look cheap.
The AGM is in a couple of weeks, perhaps that’ll give me something to worry about!
In theory:
Genius strikes twice
Stockmarket rallies that start when the market is cheap and business conditions are improving often last, says Peter Temple. So there’s little reason for optimism about the recent rally.
Fischer Black, one of the architects of modern financial theory, predicted everything in 1970, says Rortybomb.
Anna Schwartz, who lived through the crash of 1929, wrote A Monetary History of the United States with Milton Friedman, and still works as an economist, says that President Obama has employed the wrong kind of stimulus.
Add William White to the list of economists who know what they’re talking about.
A very bearish email, reportedly from the MD of one of the big banks.
The data underpinning ‘buy and hold’ is bogus, says Jason Zweig, as he rubbishes Professor Jeremy Siegel’s investment classic Stocks for the long run.
Fortune reveals the softer side of Robert Shiller.
Magic Diligence is combining Piotroski’s F_Score with Greenblatt’s Magic Formula.
Penny shares do better ‘coz the companies are smaller and more illiquid, not because there’s anything special about a low share price, reports Empirical Finance Research Blog.
Matthew Robson, a 15 year-old on a work placement with Morgan Stanley, stuns the City with his insight into media trends. Twitter, apparently, is for old farts.
And finally, talking of spectacular crashes, don’t get complacent this summer. Yes, trading will be quieter as much of the City is on holiday, but that’s precisely when the most violent market moves happen.
Comments
4 Responses to “Seduced by Celsis”
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Hi Richard,
For Celsis, I think that the complete lack of dividend and a huge amount of intangible assets is probably putting most investors off. Clearly the company is not inclined to offer a dividend even when it could clearly afford quite a good one, without impacting its ongoing operations.
I notice it does like to give out substantial options based incentives to ‘select employees’ from its retained earnings however! Clearly this has not incentivised them to push up the share price.
Anyway, the actual point of the reply was to highlight an issue I have with the F-score. Specifically the F-score will rate a change in magnitude of 1 the same as a change in magnitude of 1 million.
I think it would be more effective if the F-score measured a relative change (e.g. a change of at least 5% would be regarded as healthy for example).
What do you think?
Hi Robin, thanks for your thoughts. I must admit I tend to ignore dividends (assuming they’ll come), although it means the company is in a comfortable position now. I’ll have to look more closely at the intangibles.
Regarding the F_Score. I think Piotroski just wanted to keep it simple. He admits it’s not optimal and that there may be other factors that could be incorporated. Also small deviations in some of the factors may not be relevant at all. If a company issues a small amount of shares, for example, for share options it’s not a big deal. It issues a large amount for financing, it is.
This is one of the reasons I think it’s important to calculate the F_Score for yourself. I don’t do anything as sophisticated as you suggest, but I ofen disregard minor failings and focus on big ones as matters for further investigation.
Don’t know if you saw, but David Swarchez (sp?) gave Celsis a bit of a plug on Saturday.
I didn’t but I’ve found it now, thanks! http://uk.biz.yahoo.com/17072009/399/david-schwartz-good-crossing-fingers.html