This Undervalued Stock Offers Investors a Rare Combination

Bio-Rad Laboratories is something of a rarity: a small-cap company with a wide economic moat. The company develops products and solutions for the clinical diagnostics and life sciences industries, where it maintains a leadership position in several niche markets. Its wide moat is supported by high switching costs. Bio-Rad also owns 33% of Sartorius , a lab and bioprocessing supplier that specializes in single-use technology used in biologics manufacturing. Bio-Rad was recently added to Morningstar’s Wide Moat Focus Index. It also is one of Morningstar chief US market strategist Dave Sekera’s 5 Surprising Stocks to Buy After Trump’s Win.

Bio-Rad develops products and solutions for the life sciences research and clinical diagnostic markets and enjoys market leadership in diagnostic quality controls, antigens, and digital polymerase chain reaction molecular testing. Its business relies on the razor-and-blade model: Consumable reagents account for about 70% of total sales and are often sold at a higher margin than their associated equipment and instruments. Bio-Rad aims to maintain its current position in key markets such as blood typing and quality control while capitalizing on strong demand for molecular diagnostics. It is also focused on improving operational efficiency, which has long lagged peers. In the longer term, success will depend on whether Bio-Rad can successfully invest in research and development to maintain its diagnostic specializations. We have a positive outlook, especially in clinical diagnostics, but the company faces material competitive risks.

Key Morningstar Metrics for Bio-Rad

• Fair Value Estimate: $430
• Star Rating: 4 Stars
• Economic Moat Rating: Wide
• Uncertainty Rating: High

Economic Moat Rating

Bio-Rad has a wide economic moat supported by switching costs from an installed base of equipment in clinical diagnostics, much of which is closed-loop systems that generate recurring consumables revenue, as well as its noncontrolling holding of wide-moat Sartorius shares. A secondary moat source is intangible assets related to its strong positions in niche clinical diagnostic markets. Bio-Rad is a leader in many of its product lines; about 80% of sales are from products in which it has a top market position. While current market strength does not guarantee future market leadership or shareholder returns, the diagnostic and life sciences markets tend to favor strong incumbents, as the complexity of instruments and analysis creates lasting system familiarity benefits for practitioners.

Read more about Bio-Rad’s moat rating.

Fair Value Estimate for Bio-Rad Stock

Our fair value estimate is $430 per share. We forecast revenue growth in the low to mid-single digits for the next 15 years. Over the next five years, we forecast operating profit margin to expand approximately 500 basis points, from 12.6% in 2023 to high double digits, which we think can be achieved with a combination of transitioning some production to lower-cost facilities in Singapore and ongoing cost-cutting measures to reduce selling, general, and administrative expenses. We expect research and development expenses to stay at 9%-10% of sales over this period. Bio-Rad’s 33% equity stake in Sartorius contributes approximately 40% of our model valuation after subtracting the deferred taxes associated with its capital gains. We use a 7.5% weighted cost of capital.

Read more about Bio-Rad’s fair value estimate.

Risk and Uncertainty

In our view, the biggest risk to Bio-Rad’s valuation is increasing product competition, particularly in molecular diagnostics. The company also faces uncertainty on whether it can improve operating results, which have historically lagged peers. Cost-cutting by the US government in the form of price controls and restrictions in diagnostic reimbursement for programs such as Medicare can directly affect Bio-Rad’s clinical diagnostics business. Further reimbursement cuts could meaningfully affect sales and profits in the longer term. Bio-Rad’s life sciences business may face headwinds if academic research budgets are cut. Investment levels from biotech startups and large biopharmaceutical firms will ultimately affect demand for life sciences tools as well as bioprocessing equipment.

Read more about Bio-Rad’s risk and uncertainty.

Bio-Rad Bulls Say

• Bio-Rad is a leader in niche areas including quality controls, antigens, and digital PCR, and it has a strong razor-and-blade model in clinical diagnostics.
• Its noncontrolling stake in Sartorius gives Bio-Rad material economic exposure to the bioprocessing market, a highly regulated industry with attractive long-term secular growth trends.
• Although one-off items have affected results, such as a restructuring that began in 2017 and a cyberattack in 2019, the company has since then made progress on improving its operating profitability.

Bio-Rad Bears Say

• Bio-Rad’s consolidated businesses operate in markets with growth rates that are on the lower end of the life sciences industry.
• Bio-Rad has historically not operated as efficiently as peers, although it has made progress in ameliorating this concern in recent years.
• The company faces uncertainty from high competition in its fragmented markets and must continue to innovate to stay competitive.

This article was compiled by Susan Dziubinski and Sylvia Hauser. Data as of Nov. 13, 2024.