BULL POINTS:
■ Plenty of cash
■ Scope for dividend growth
BEAR POINTS:
■ Over-valued as an internet firm
■ Lacks "scale-ability"
■ Delays to US research funding
■ Little presence in China
One of the toughest decisions an investor has to make is when to call the top on a successful investment. Get out too early and further gains are lost; too late and risk giving back profits if unforeseen events hit the share price. Shares in medical services company Abcam present investors with precisely this dilemma; and it's not made any easier by Abcam's deserved reputation as a well-run company. However, shareholders who bought into Abcam five years ago would have seen their investments more than quadruple in value. That's excellent considering what has happened to the stock market indices during the same period, but ultimately that success only increases the scrutiny of Abcam's business model and its markets.
The rise in value has been so impressive that Abcam's share rating now bears little relation to any company in the healthcare or medical technology sectors and has more in common with internet distribution companies, such as Amazon or Asos. That comparison is flattering and reflects the excellent niche Abcam has developed in shipping antibodies to companies and research institutes who order via an online web site. However, it may ultimately prove to be a weakness as a straight comparison of business models reveals some crucial differences.
| IC TIP RATING | |
|---|---|
| Risk rating | High |
| Timescale | Short term |
| What do these mean? Find out in our | |
To begin with, Abcam's markets are heavily regulated, so adding products in addition to antibodies and shipping them around the world on the existing platform could run into regulatory hurdles. In contrast, Amazon can simply add a new line. This is what online retailers rather clumsily call "scale-ability" and it is an area where Abcam is comparatively deficient.
Second, Abcam is exposed to the vagaries of public spending in a way that affects no other internet distribution firm. This is the single biggest worry and the signs are that delays to research grants are starting to depress demand in the huge US antibody market.
Figures for US research spending compiled by broker Edison Investment Research suggest a slowdown in research grants without additional stimulus spending. The Recovery Act stimulus package, passed by Congress in 2009, accounted for a cumulative rise of $7.7bn in research grants as money flowed into disbursing bodies such as the National Institutes of Health (NIH) in 2009 and 2010. That period of spending coincides neatly with Abcam's time of greatest sales growth. But, without stimulus spending this year, NIH grants are forecast to increase by only $2.2bn to $32.2bn, Edison estimates.
| ORD PRICE: | 420p | MARKET VALUE: | £763m | |
| TOUCH: | 417-420p | 12M HIGH: | 470p | LOW: 276p |
| DIVIDEND YIELD: | 1.5% | PE RATIO: | 28 | |
| NET ASSET VALUE: | 33p | NET CASH: | £47m | |
| Year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 36.6 | 8.0 | 3.4 | 1.1 |
| 2009 | 56.8 | 16.3 | 7.0 | 2.4 |
| 2010 | 71.1 | 25.8 | 10.8 | 4.0 |
| 2011* | 84.4 | 31.8 | 12.9 | 5.3 |
| 2012* | 98.6 | 37.4 | 15.1 | 6.5 |
| % change | +17 | +18 | +17 | +23 |
Normal market size: 1,250 Matched bargain trading Beta: 0.3 Edison Investment Research forecasts | ||||
More share tips and updates...
While it has a big exposure to mature markets (in addition to the US, 25 per cent of its sales come from the EU), Abcam has little presence in China, where research spending is rising rapidly but profit margins are lower. Currently, Abcam generates just 4 per cent of its sales in China, so it will need to expand there rapidly to help offset the dominance of US revenues in its income statement.
