Burnick's R&D Bargain

06/24/2005 12:00 am EST

Focus:

Michael Burnick

Editor, Real Wealth Report

Mike Burnick is the editor of Elite Stock Trader , an exclusive trading service published by Weiss Research and designed primarily for  sophisticated investors. Here, the advisor looks at the potential of a company that is "cashing in on the biotech R&D boom."  

"Molecular Devices (MDCC NASDAQ), a leading supplier of bio-analytical test and measuring equipment, is helping the biotech and drug industry perform groundbreaking research and posting stellar financial results in the process. The company makes state-of-the-art test and measurement instruments designed to help medical researchers get the most out of each research dollar. The firm sells its high-tech analytical equipment to biotech, pharmaceutical, and life science companies worldwide. These precision instruments enable researchers to work more productively and efficiently, which speeds the time-to-market for new medicines.

"The biotech and pharmaceutical industries are big businesses, with very deep pockets. In fact, the two sectors spend a combined $70 billion per year on R&D, hoping to discover new wonder drugs. And Molecular Devices is attracting more than its share of that spending. The firm is reporting sizzling sales growth. Molecular's sales jumped a whopping 29% in 2004 to $148.5 million from the year before. Then in the first quarter of this year, sales surged 43%, year-over-year, to $39 million.

"Bottom-line earnings growth looks terrific, too. Fat profit margins mean fast profit growth. Diluted earnings from continuing operations surged 43% last year. They hit a record 73 cents per share, up from 51 cents a share in 2003. First quarter 2005 profits moved up 30% to 13 cents a share. The main reason for such fast-paced profit growth is healthy pre-tax profit margins of better than 20%. The average pre-tax margin for firms in the scientific and technical Instruments industry is a paltry 5.4%. Clearly, Molecular Devices has a huge competitive advantage.

"Perhaps best of all, this stock looks like a big-time bargain. Molecular Devices trades at just 18.5 times trailing 12-months earnings, compared to an average p/e of 24.8 for the scientific and technical Instruments group. Yet over the next three to five years, Molecular Devices is expected to report profit growth of 22.5% on average, versus just 15.8% for its industry. That gives the stock a big valuation advantage. All of this makes the stock a screaming bargain in my book. And I see outstanding profit potential the share price from here."

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