In 2015, a record 69 M&A (merger and acquisition) deals were completed, worth more than $5 trillion, and 10 of those deals surpassed $50 billion. Healthcare mergers contributed $724.4 billion, up 66% from the prior year. And according to Ernst & Young’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
4) An improving economy, giving acquirers stockpiles of cash
I’m always looking for companies that build a niche for themselves—organically or by acquisition. And recently, we highlighted such a business as our Spotlight Stock in Wall Street’s Best Investments newsletter.
The company is Mesa Labs (MLAB). And as our contributor, Tom Byrne of The Periscope Report notes, it is a serial acquirer, scooping up companies around the world to grow its market share.
Taking Advantage of a Fragmented Market
Mesa Labs makes quality control instruments and disposable products, mainly for medical purposes. It operates through three segments: Instruments, Biological Indicators and Continuous Monitoring.
Products include medical meters and calibration for dialysis machines; chemical indicators that are used to assess the effectiveness of sterilization processes; and systems which are used to monitor various environmental parameters, such as temperature, humidity and pressure.
Mesa 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 the market 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.
Mesa Labs Could Become a Target Itself
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 39.9% next year—considerably higher than the 0.5% expected for the S&P 500 index. This quarter alone, EPS is expected to rise by 54.1%.
Tom noted that in the fourth quarter of last year, Mesa Labs acquired six of its European biological indicators distributors, and then bought two more right after the end of the quarter—acquisitions that will add approximately $1.3 million annually to revenues, and be profitable immediately.
The company just closed on a deal to acquire substantially all of the assets of Autoclave Testing Services, a New York company, and Autoclave Testing Supplies, a British Columbia company—businesses that supply products and services for dental sterilizer testing in both the U.S. and Canada. This purchase is slated to increase Mesa’s revenues by some $1,250,000 to Mesa’s revenues and to be accretive to net income per share during the first 12 months.
Yet the company is still small, and with so much fragmentation in the industry, it might very well become a target for a larger healthcare business. And if that happens, its stock could suddenly become very attractive.
The company’s shares are followed by just a couple of analysts, who currently rate it a Buy. But volume is light and its market cap is just $346.41M, so if you decide to jump in, don’t chase the shares!
Happy investing,
Nancy Zambell
Editor, Wall Street’s Best Investments and Wall Street’s Best Dividend Stocks
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