Last year was the best year ever for mergers and acquisitions. According to Bloomberg, global M&A amounted to an astonishing $3.8 trillion in 2016, beating the deals made in 2007, the previous best year. And the deals were huge! In 2015, a record 69 deals were worth more than $10 billion, and 10 of those surpassed $50 billion.
Healthcare mergers contributed $724.4 billion, up 66% from the prior year. And according to EY’s Firepower Index and Growth Gap Report 2016, $300 billion of that total came from biotech deals, easily beating the previous record of $200 billion set in 2014.
This boost in M&A activity is propelled by four factors: 1) the need to drive down costs and increase efficiencies; 2) the rise in biologics (Wikipedia describes biologics as genetically-engineered proteins derived from human genes, designed to inhibit specific components of the immune system that play pivotal roles in fueling inflammation), which Generic Engineering News reports accounted for 10 of the top 25 best-selling drugs in 2014; 3) cheap debt; and 4) an improving economy, giving acquirers stockpiles of cash.
All of that spells “opportunity” for our Spotlight Stock.
Mesa Labs (MLAB), as Tom Byrne of The Periscope Report, indicates, is a serial acquirer, scooping up companies around the world to grow its market share. The company operates in the global medical device industry, expected to grow to $384 billion this year. The U.S. is the largest medical device market in the world—around $110 billion—and is forecast to reach $133 billion this year. Yet, it is also extremely fragmented with more than 6,500 medical device companies, of which 80% have fewer than 50 employees. That means lots more candidates for Mesa to target.
And Mesa has the chops to do so. Its three-year average revenue growth is 21.7%—more than three times the 6.3% industry average. And according to Thomson Reuters, Mesa is expected to increase its earnings by 13.30% this year, walloping the S&P 500’s estimated 2.60% growth. Further, Thomson forecasts that Mesa’s earnings will rise by 39.90% next year—considerably higher than the 9.30% expected for the S&P 500 index.
Yet this company has a market cap of just under $300 million. And that makes it very attractive for the larger medical device companies, including: Johnson & Johnson (market cap of $27.50B), GE Healthcare ($18.29B), Medtronic ($17.00B), Baxter International ($16.67B) and Siemens Healthcare ($15.77B)—not to mention some of the smaller-tier device businesses that could easily target Mesa.
Right now, the company has very little analyst coverage, but the average target price is $115—almost 40% higher than its current trading price. Shares recently rose above their 50-day moving average, indicating growing momentum.
One caveat: Mesa shares look very attractive, but please remember that it is a small-cap company, so don’t chase the price. I recommend that you place a buy limit of about 10% higher than current prices. If too many folks jump on board all at once—without limits—the activity will push the shares unrealistically high, and then they will immediately come back down to earth. So just add them in measured amounts, and be patient.
