KeyStone’s Stock Talk Show, Episode 211.
Great to be back with you this week. We have a busy show this week with 4, count them Brennan, 4 YSOT’s. More listeners equal more questions. I will kick them off a look at Hamilton Thorne Ltd. (HTL:TSX-V) a provider of precision instruments, consumables, software and services that reduce cost, increase productivity, improve results and enable breakthroughs in Assisted Reproductive Technologies (ART), research, and cell biology markets. The stock is historically cash flow positive and recently posted solid organic growth, but is it translating to strong cashflow per share? I will let you know. Aaron will be answering a viewer question on Palantir Technologies Inc. (PLTR:NYSE), builds and deploys software platforms for the intelligence community in the United States to assist in counterterrorism investigations and operations. The company provides Palantir Gotham, a software platform which enables users to identify patterns hidden deep within datasets. Aaron let’s you know if this stock should find a place as the Batman style anti-hero in your portfolio. Brennan, answers a viewer question on Alexandria Real Estate Equities Inc. (ARE:NYSE), an office REIT focusing primarily on the life science and biotech markets. The stock has been cut in half YTD from its highs of approximately $225 per share – is there an opportunity or is it a falling knife? Finally, Brett review a viewer question on 23andMe (ME:NASDAQ), a consumer genetics and research company. Brett will let you know if the company has isolated the “stock pickers” gene, but more importantly answer if 23andMe should be part of your portfolio.
Hamilton Thorne Ltd. (HTL:TSX-V)
Price: $1.63
Market Cap: $237.13 Million
Company Description: sells lab equipment, consumables, software and services primarily to the global assisted reproductive technology (ART) industry, which captures in-vitro fertilization (IVF). HTL sells the portfolio of branded and third-party offerings on a global basis, through direct sales and distributors.
Balance Sheet:
Cash: $15.85 million
Debt: $16.97 million.
Net debt of just over $1 million.
Financial Highlights
- 1st quarter sales increased 19% to $16.7 million; sales for the quarter increased 24% on a constant currency basis
- 1st quarter adjusted EBITDA increased 13% to $2.8 million; 4th quarter EBITDA increased approximately 18% on a constant currency basis
- Organic sales growth was 15% for the quarter
- Gross profit margin was 50.6% for the quarter up 185 bps versus the prior year
- Net income decreased to $77 thousand for the quarter – minimal net income.
- Cash used in operation was $
The company has historically been cash flow positive and this should be the case over the remainder of 2023. But, even taking last year’s operating cash flow of $1.8 million, the company trades at 132 times cash flow. 2022 cash flow was depressed, so if we go back to 2021 operating cash flow levels, the stock trades at about 42 times. Historically, the company trades at 20-30 times cash flow.
Share Structure:
Historically, the company has grown via acquisition and has issued share and used debt to pay for that growth. This has taken the share count from 52 million shares in 2014 to 144.8 million shares today. That is almost 3 times higher. While Hamilton Thorne is not nearly the worse offender in this respect as cash flow has increased historically on a per share basis. We find that the most successful small and mid cap companies long-term, find ways to provide less dilution as they grow over time. Including in this list would be long-term 10x gainers such as XPEL Inc, Hammond Power, Boyd Group, and WaterFurnace – names from our coverage that have produced tremendous growth with limited share dilution long-term.
Our Take:
I see Hamilton Thorne as a business run by competent management in a solid industry that is currently producing strong organic growth. The company has a reasonable balance sheet and has growth revenues at a solid pace form $7.9 in 2013 to $78.8 in 2022. Over that time, the stock has performed well from the $0.10 range to $1.63 today. Operating income and EPS has been a bit more volatile over that period. In 2013 operating income was roughly $400,000 and surged to $5 million in 2018 and 2019, but has failed to return to that level since, declining during 2020 (COVID related) and moving closer in 2021 to $4.8 million but declining to $3.3 million in 2022 and, as we stated, cash flow as negative to start 2023. Operations should continue to normalize and contributing to the negative cash flow was the timing of increased accounts receivable and reduced accounts payable at quarter end. Inventories were up slightly as the company begins to unwind the significant investments in inventory that were made in 2022.
On a positive note, organic growth, which eliminates the effects of both acquisitions and exchange rates, was up 15% for the quarter, reflecting continued market share gains. Management has stated they are actively working on multiple acquisition opportunities.
Hamilton Thorne is interesting and in a good niche, but the stock currently trades at roughly 90 times trailing EPS and well above its historical cash flow multiples. Good business, but expensive until it cash generate better cash flow.
YSOT – Alexandria
Jack via email – Curious about Alexandria Real Estate Equities REIT (NYSE: ARE). It has long term debt at a low interest rate of 3.6%, long term occupancy with over 90% of space occupied. Apparently, there was a recent large percentage rental rate increase, and both Motley Fool and Zacks recently singled the stock out for it being a bargain.
Slide 1
Alexandria Real Estate Equities Inc. (ARE:NYSE)
Price: $119.72
Market Cap: $20.7 Billion
Dividend yield: 4.05%
It is an office REIT focusing primarily on the life science and biotech markets.
The stock was essentially cut in half YTD from its highs of approximately $225 per share.
Slide 2
Description:
Alexandria is an owner, operator, and developer of collaborative life science, agtech, and advanced technology campuses in AAA innovation cluster locations, including Greater Boston, the San Francisco Bay Area, New York City, San Diego, Seattle, Maryland, and Research Triangle.
The company has 850 tenants and an asset base in North America of 75.6 million square feet as of March 31, 2023.
Slide 3
Alexandria claims that its differentiation is the “cluster” model in life science, agtech, and advanced technology campuses that provide its tenants with highly dynamic and collaborative environments.
And I put up on the screen here just what their Seattle Cluster looks like.
Just as a last note, Alexandria also provides strategic capital to transformative life science, agrifoodtech, climate innovation, and technology companies through its venture capital platform. As of March 31, 2023, the company had $1.6B in investments on its balance sheet.
Slide 4
Recent Financials (Q1 2023)
- Total Revenue was up 14% to $700.8M from $615.1M in Q1 2022. The growth was primarily driven by strong rental rate growth of 48% which represents the highest quarterly rental rate growth in the company’s history.
- Same Property NOI growth was 3.7%.
- Adjusted Funds from Operation (AFFO) per unit was up 7% to $2.19.
- As of March 31, 2022, Alexandria held $1.26B in cash and Debt of $11.6B, providing a net debt position of $10.3B and a trailing net debt to AFFO multiple of ~8 times.
- As Jack mentioned in his email to me, the company’s long-term debt has a weighted average interest rate of 3.7% and essentially all of it is fixed rate with no maturities until 2025 and a bulk of the maturities taking place after 2027.
- Valuation metrics – Trades with a trailing price-to-AFFO multiple of 14.5 times.
Just a quick couple of side notes from the company’s conference call.
- In response to the uncertainty and volatility in the markets, management made a strategic decision to reduce 2023 construction spend by $250 million (to $2.7B). And they are looking to allocate about $225M for acquisitions throughout 2023.
- 95% of its leases contain contractual annual rent escalations approximating 3%.
Slide 5
Looking forward at the company’s 2023 guidance, it anticipates to maintain ~95% occupancy and have rental rate increases of 28%-33%. And AFFO Per share is expected to grow approximately 6.4% to $8.96. And would equate to a forward Pirce-to-AFFO multiple of 13.4 times.
Slide 6
CONCLUSION
To conclude, I think that Alexandria is a relatively attractive REIT, especially in the Office REIT space…
It pays a decent dividend yield and has a reasonable payout ratio. And has grown that dividend considerably over time.
The company has produced good AFFO per unit growth over the last 9 quarters and is projecting for about 6.4% in 2023. And while its trades at 14.5 times trailing and about 13.4 times forward AFFO, I do not think that the valuation is unreasonable for this growth.
I also think that the company’s balance sheet is relatively attractive given that a majority its debt is fixed and it has reasonable leverage ratios.
YSOT 23andMe ME:NASDAQ
1)
We got a question from Bill via Email on 23andMe wondering about the value of their genetic data.
23andMe symbol ME or Me on the Nasdaq currently trades at $2.05 a share with a market cap of $940 million. Founded in 2006, 23andMe is a consumer genetics and research company. The company has built the world’s largest crowdsourced platform for genetic research. The company became public through a SPAC in 2021, where it has fallen about 80% since.
2)
Let’s do a quick look at the financials for fiscal Q3 2023.
Revenue came in at $67 million an increase of 18% year-over-year, primarily due to the acquisition of the telehealth service company Lemonaid.
The company still had an adjusted EBITDA deficit of $43 million compared to a deficit of $64 million in the prior year.
23andMe continued its streak of net losses. For the quarter the company had a net loss of $92 million compared to a loss of $89 million in the prior year.
On a more positive note, the company has a large cash position of $432 million, roughly 46% of the market cap. But also had net cash used for operations of $120 million for the first 3 quarters of fiscal 2023, this even includes a one-time payment from GSK to extend its exclusive partnership with 23andMe for research.
3)
So with its current operations, value isn’t being created for investors. The company’s management knows this which is why they are looking to leverage its genetic database by integrating it with telehealth services. Effectively they want to use their existing genetic testing to give customers a profile of diseases that they are at risk of and integrate those results with telehealth and pharmacy services. As of right now, they don’t appear to be creating any synergistic relationship as far as revenue growth, and when asked about cost synergies in the last earnings call management gave a non-answer of saying the two companies are complementary and their focus is on increasing value for the customer, so in reality, they are unlikely seeing cost synergies.
4)
However, they are involved in research leveraged by their data to help in the development of treatments, which currently accounts for 20% of its revenue for the last quarter. All the revenue for the research segment comes from its GSK partnership which ends in July of this year, this could alter the revenue of this segment significantly. Management can’t comment on any potential partnerships until the exclusivity period ends so right now we’re in the dark for prospective partnerships.
The blue sky opportunity for the company is the success of treatments derived from its genetic database. The company currently has a notable treatment in development, an antibody treatment that targets CD200R1 a potential cancer treatment currently in phase 2a. If successful, the drug could be extremely lucrative for the company, but it still has significant hurdles to pass, and may never materialize.
As well, they could potentially receive royalties from GSK 608 which is being developed by GSK and is in phase 1.
5)
The company’s core asset its data could be at risk long term. 23andMe uses genotyping for its analysis as it is cost-effective for consumers, however, the superior Gene sequencing has come down in price by magnitudes. New genetic databases derived from gene sequencing could supersede the competitive advantage of 23andMe’s wide user base by providing the depth researchers desire.
Overall, the company does not fit our criteria, it is not even near profitability, and is burning cash. Its current bullish investment thesis is the same as many biopharma companies of if their treatments can make it to market at scale while facing the potentially decreasing value of its existing database. It is just not something that we would invest in at this time.
