Hinterhaus Productions
Towards the end of last year, I believed that more was needed than a name change in the case of Revvity, Inc. (NYSE:RVTY) as the former PerkinElmer business changed its name after a turbulent period of time.
Following a boom in the diagnostics segment during the pandemic, the company made some poor capital allocation decisions, which means that the business is back to square one pre-pandemic. No immediate appeal is seen, with 2024 set to become another lost year, with hopefully an inflection point seen for growth in 2025.
About Revvity
Pre-pandemic, Revvity was a $3 billion business which generated revenues from discovery and analytics activities, performed under a single roof, for clients in the life science, food, environment and industrial markets. Specific products and applications to think about include imaging, chromatography, detection, spectroscopy, among others.
With earnings trending around $4 per share, a $100 stock looked fairly valued at the time. The diagnostics part of the business saw a huge boost with the outbreak of the pandemic, causing shares to double to a high around $200 late in 2021. This was backed up by great profitability from these activities during this period of time, with revenues nearly tripling to $8 billion in 2021, with earnings posted around $11 per share. On top of this momentum, market conditions spurred a couple of big capital allocation decisions as well.
One of these was a huge and expensive $5.25 billion deal for BioLegend in 2021, adding some $380 million in sales. What followed was a gradual pullback in sales and earnings as the pandemic was on its retreat. In 2022, the company reached a $2.45 billion deal under which it would sell its applied, food and enterprise business, although that net cash proceeds were seen at just $1.9 billion.
Fast-forwarding to the end of 2023, the shares of Revvity traded around $108 per share. For the year 2023, the company initially guided for sales around $2.94 billion, with earnings topping $5 per share. After three quarters of significant year-over-year sales declines, it became apparent last fall that the company was going to miss that guidance, with full-year sales seen around $2.73 billion, and earnings seen around $4.55 per share. The limited fall in earnings per share came in part amidst aggressive share buybacks, which came at a drawback as net debt ticked up to $2.5 billion.
With 124 million shares trading at $107, a $13.3 billion equity valuation and $15.8 billion enterprise valuation was by no means cheap at around 6 times sales, 23-24 times adjusted earnings, as EBITDA of $850 million resulted in a leverage ratio around 3 times. This was in line with the valuations of industry leaders Thermo Fisher (TMO) and Danaher (DHR), yet I was underwhelmed by the capital allocation decisions, that of divesting some assets too cheap, while buying BioLegend at a huge premium.
As I was still in doubt if growth would return (convincingly) in 2024, I was watching the shares but found it too early to commit, as I have been underwhelmed by the performance of the business and its management team.
Stuck
Since the start of the year, shares of Revvity have largely been stuck in a $100-$110 range, now trading at $102 per share. In February, the company reported its 2023 results, with revenues coming in at $2.75 billion after fourth quarter revenues were down another 6%. The company saw full year adjusted earnings fall from $6.92 to $4.65 per share after no less than 11 adjustments, mostly relating to amortization charges.
The outlook for 2024 has been underwhelming, calling for stagnation at best, despite the secular growth trends and inflationary trends. Full-year sales are seen up slightly to $2.79-$2.85 billion, with adjusted earnings seen flat at $4.65 per share, plus or minus ten cents.
By now, the company exists out of two very profitable operations. Life science revenues were flat in 2023 at $1.29 billion, with adjusted operating margins seen in the high-thirties. Diagnostics revenues were down 28% to $1.46 billion amidst the post-pandemic environment reverting, as adjusted operating margins of 22% were down over 16 points on the year before. This meant that the business has become split pretty evenly between both segments, with some 80% of sales generated from consumables, being a very diversified business with activities across the globe.
Late in April, it became apparent that the company started the first quarter on a softer note, with sales down 4% to $650 million. Ironically, the softness was the result of softer life science revenues and margins, with diagnostics performance being rather flat. While the company maintained the full-year profit guidance, it cut the revenue guidance by $30 million already. Net debt ticked down to $2.2 billion, which is rather comforting here, mostly as share buybacks slowed down a lot and cash flow generation has been solid in the first quarter.
What Now?
The reality is that this is again some kind of lost year, in which revenues and earnings are both flattish at best, all while the company still torches along a 2.7 times leverage ratio with net debt reported at $2.2 billion.
While the company has seen encouraging trends in conversations with customers, it did not translate into an inflection point yet, as the first quarter softness stood at the basis of a small revenue cut for the year.
The reality is that right here, the company still commands somewhat of a premium multiple, with shares trading at a 22 times adjusted earnings multiple, while leverage is full, but manageable. All in all, the net impact of all of this is rather negative. Compared to 2019, the company has only seen sales declines, amidst the impact of the pandemic, the smaller revenue contribution from the BioLegend acquisition, while an important part of the business was divested as well.
I have to confess that Revvity, Inc. has lost quite some regard with me, as the company is not living up to its positioning here in terms of operating performance, while some value has been destroyed with bold capital allocation moves as well. Given all this, I am still cautious even as shares look quite cheap, which they are not yet certainly.
Given this, I am cautious about getting involved just yet, even as the inflection points seem to be on its arrival in the near term, as Revvity still has quite a bit to prove.
