Abcam is a consistently successful distributor of the proteins used in medical research, which it maintains via a vast library of molecules that can be accessed and ordered over the internet. Simultaneously, its shares are highly rated compared with those of medical-services companies. This makes a recommendation to sell them a natural 'against the herd' trading idea.
- Plenty of cash
- Market still fragmented
- Rating is vulnerable to bad news
- Public funding still weak
- Uncertainty over latest acquisition
- Low barriers to entry
However difficult it is in practice, shorting Abcam's shares can be rewarding, as our successful sell tip just over a year ago showed. That's because the company's high rating is often vulnerable when news turns less positive, particularly on the outlook for public sector spending. And, interestingly for traders, the set of circumstances that undermined Abcam's share price last year look set to be repeated as both the EU crisis and the impasse over the US Federal budget add to an uncertain outlook.
The basic worry is that spending by research agencies in Europe and the US will come under further pressure as budget cuts bite. This was confirmed by cautious statements in July from medical-testing equipment suppliers Sigma-Aldrich and Qiagen. The problem first arose last year when spending by various US public health institutes began to slow as the effect of stimulus spending wore off and, without a second tranche of money to boost the sector, spending on research will start to slow this year. That effect could be compounded by the concern that Abcam is especially dependent on public spending to generate sales as pharmaceuticals companies have devoted much of the past three years to slashing their research and development spending.
ABCAM (ABC) | ||||
|---|---|---|---|---|
| ORD PRICE: | 404p | MARKET VALUE: | £801m | |
| TOUCH: | 404-405p | 12-MONTH HIGH: | 434p | LOW: 317p |
| DIVIDEND YIELD: | 1.6% | PE RATIO: | 27 | |
| NET ASSET VALUE: | 46p | NET CASH: | £17m | |
| Year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 56.8 | 16.3 | 7.0 | 2.42 |
| 2010 | 71.1 | 25.8 | 10.7 | 4.01 |
| 2011 | 83.3 | 32.1 | 13.2 | 5.25 |
| 2012* | 96.7 | 36.7 | 14.6 | 5.95 |
| 2013* | 119.6 | 41.4 | 15.2 | 6.35 |
| % change | +23 | +13 | +4 | +7 |
Normal market size: 1,000 Matched bargain trading Beta: 0.7 *Canaccord Genuity forecasts (earnings are not comparable with historic figures) | ||||
Abcam's bosses have recognised this imbalance and have tried to compensate by broadening the group's product range. The acquisition of Epitomics this year for $170m (£107m), will open up a new area for Abcam in custom-designed antibodies. That may help, but City analysts fret that it's not clear how Abcam will integrate this more specialised area into its existing business, which is essentially an online distribution service that prizes flexibility. The acquisition may have helped to shore up the business, hence a share re-rating earlier this year, but broker Canaccord Genuity reckons that Abcam's underlying sales growth slowed in the second half of 2011-12 by almost one percentage point to 11.5 per cent, indicating difficulties especially in the US.
Other worries about Abcam revolve around the ease with which its business model can be copied. In theory, anyone savvy enough to start a website, lease a warehouse, engage a regulatory consultant and look up the number for DHL can launch a similar enterprise, which is possibly why the medical distribution market has remained stubbornly fragmented. And fragmented it is likely to stay, with some of the bigger players opting to return cash to shareholders rather than fork out for acquisitions.
