Why Larry Robbins Likes Life Technologies (LIFE): Stock of the Week ~ market folly

Monday, May 7, 2012

Why Larry Robbins Likes Life Technologies (LIFE): Stock of the Week

This week's stock is Life Technologies (LIFE).  Larry Robbins' hedge fund Glenview Capital has held LIFE as a core position for a while now, so it's worth examining what they see in the name.  And if you missed them, scroll through all previous stock of the week posts here.

At the end of 2011, LIFE was Glenview's largest disclosed US equity long.  At that time, they were also the second largest institutional owner of the company's shares.

We covered Glenview's thesis on LIFE back in 2011 as it's been a core holding for the hedge fund.  Back then, Robbins argued that the company was cheap on a valuation basis and was likely to grow EPS 20% over the next few years.  He also pointed out that the company's free cashflow was 91% of EPS and its dominant market share versus competitor Illumina (ILMN).

Below we'll hear an opinion from Tsachy Mishal, portfolio manager at TAM Capital Management.

About a year ago I attended an investment conference where Larry Robbins of Glenview Capital made a compelling case for Life Technologies. It was the best investment pitch I heard that day and I left wanting to do more research on the stock. After researching the company on my own, the stock seemed interesting but I was not as excited as Larry Robbins was about it. A year later the stock is sitting more than 10% lower and I have decided to take a fresh look.  

Life Technologies is a life sciences company that sells equipment and consumables to pharma & biotech companies, hospitals, universities, labs etc.  The bulk of their revenue is in consumables which is a high margin, recurring business. The enterprise value (EV) is $10.3 billion and the free cash flow (FCF) in 2011 was $704 million and is expected to grow to well over $800 million by 2013. Life Technologies trades at an EV/FCF ratio of 14.5 times. Considering that revenue is supposed to grow in the low single digits this seems like a fair multiple. 

The bull case is that the multiple does not take into consideration a valuable asset that is currently not generating much revenue and earnings. Life Technologies purchased a company called Ion Torrent for $725 million. They make a genetic sequencer that competes with Illumina's (ILMN) technology. Illumina recently rejected a $6 billion bid from Roche and likely could have demanded more. While Ion Torrent is a distant second they are growing rapidly. Life Technologies is getting little credit for this product line in its valuation.

What I Like:

- It is very likely that Ion Torrent is worth considerably more than the $725 million LIFE paid for it

- Once one considers the value of Ion Torrent and what free cash flow will look like in a couple of years the valuation on Life Technologies seems attractive.

- Life Technologies will benefit from the secular trend in the aging of the population, biologics, and genetic technology.

What I Don't Like:

- LIFE derives 45% of its revenue from the government and education sector.  I am always hesitant to buy companies where the customers are in trouble.  With bulging deficits, these are not the ideal customers.

- I am going to preface this by saying that I have never met the management of LIFE and did not do much research on them.  For all I know, they might be the most honest people out there.  That said, I always get nervous when a management team comes from GE.  There is nothing scarier than waking up one morning and finding out a company you own has been aggressive in their accounting.  That happens too often with GE management teams.

The bull case on Life Technologies is dependent on the value assigned to Ion Torrent. While I recognize that Ion Torrent is a valuable asset, it is not the type of asset that I typically buy. I am a value investor and Ion Torrent is a growth asset that sells at a growth multiple. Since the upside in the stock is dependent on this asset I will once again pass on Life Technologies.

If you missed them, be sure to also check out previous stock of the week posts:

- Why Steve Romick Owns WellPoint

- Why David Einhorn Owns Dell

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