MDCC: Upgrade to Outperform; maintain $28 target
2006-07-24 08:41 (New York)
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Infinium Securities
Jonathan McCarthy 416-360-5228
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Recommendation & valuation
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We maintain a 12-month target of $28.00, based on a DCF valuation – but
upgrade to Outperform from Underperform following Friday’s 23% sell off.
• Solid entry point. MDCC shares have traded from $19.00 to $36.00
over the past year, despite no fundamental change in management,
strategy or competitive position. At a price approaching $22.00, we again
believe that MDCC shares are attractive.
• Relative valuation. MDCC now trades at 19.4x and 16.2x our 2006 and
2007 EPS estimates, respectively – roughly in line with its larger peers.
We continue to believe that Molecular Devices will deliver above-average
organic growth and EPS growth over the next three years.
• Absolute valuation. Our $28.00 price target assumes 7% to 8% organic
growth and modest EBIT margin expansion beyond 2007. If MDCC’s end
markets improve, or its effective tax rate declines, our DCF model could
prove conservative.
• Catalysts. While year-over-year comparisons are difficult in H2, it seems
that expectations have been lowered to the point that MDCC will deliver.
In particular, we believe that high-content screening will recover quickly
from the Q2 miss.
Fundamental thesis unchanged
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Our fundamental thesis is unchanged: Molecular Devices is well-positioned
to capture an increasing share of instrument budgets via its innovative suite
of products, proven acquisition strategy and focused R&D spending.
In 2007, we expect a recovery in organic growth to 8%, driven by continued
market share gains in microplate detection (competitors include PerkinElmer
and Tecan), a quick recovery in high content screening and next-generation
products in automated electrophysiology.
Stock volatility
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We expect MDCC will continue to trade in a wide range, as investors try to
discern between lumpy quarterly revenue and a genuine recovery in organic
growth. Investors should look to buy on weakness and sell into strength.
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