Bruker: A confusing takeover spree (NASDAQ:BRKR)

I looked at the stock in late April Bruker Corporation (NASDAQ:BRKR) after the company pursued an aggressive acquisition strategy that included several smaller deals and two larger acquisitions as it paced deals raised some questions.

As the recent wave of dealmaking had a significant, if largely unknown, impact on Bruker, much was unclear regarding the impact of these deals on sales, earnings and debt.

I had hoped and believed that the first quarter results would provide greater transparency, but this did not happen. In fact, unexpected stock sales only add to the confusion.

Leading the postgenomic era

The headline above represents Bruker’s mission as the company has recently attempted to reinvent itself and transform into a high-growth company. Founded in 1960, the company focused on high-value analytical technologies and beyond time has changed business with the advent of new technologies.

In 2022, the company generated approximately $2.5 billion in sales with approximately 8,500 employees. The company saw significant growth in 2023, a year in which revenues grew by approximately 17% to $2.96 billion. Approximately 90% of these sales are from scientific instruments, with the remaining sales from Energy & Supercon Technologies.

The company develops and sells equipment used in the life sciences, analytical, semiconductor, materials and packaging industries, among others. With a solid geographic footprint, the company is quite diversified and truly global. While earnings momentum was strong in 2023, this was only partly reflected in the financial results, with adjusted earnings increasing just 10% to $2.58 per share.

The growth rate recorded in 2023 was impressive and was expected given the company’s positioning. However, it is true that the growth performance so far has been less impressive. While previous growth was somewhat disappointing, per-share growth was slightly better after the company retired about 15% of its shares over the last decade.

In response to the momentum, stock prices rose to a high of $95 per share in March, and the stock started the year around $70. After a strong 2023, the company projected 2024 sales to grow by about 10% to $3.26 billion, with organic growth of about 6% and adjusted earnings of about $2.75 per share. This resulted in a demanding 35x adjusted earnings multiple of $95 and a still demanding 28x earnings multiple of $78 in April.

A huge deal-making frenzy

After a strong 2023, the company has been very aggressive in closing deals. Earlier this year, the company announced the purchase of Nion, Tornado Spectral Systems, Chemspeed, Spectral Instruments Imaging and another smaller Japanese company, all of which were true bolt-on deals.

The company also announced two larger transactions. In February, the company concluded a transaction to acquire ELITech for EUR 870 million. This European company with its own molecular diagnostic systems will increase sales by approximately EUR 150 million, representing almost six times sales.

In April, the company announced the purchase of NanoString Technologies. The company spent $393 million to acquire a provider of spatial transcriptomics and gene expression analysis services. Post-bankruptcy, the $168 million sales contribution seems cheap, but of course there are real questions to be asked about the margin profile.

I estimated the total value of all these transactions to be $1.5-2.0 billion, bringing pro forma net debt to $2.3-2.8 billion. Given the uncertainty of pro forma EBITDA, I believed leverage ratios would increase to around 3x, although there was a lot of uncertainty around this. I eagerly awaited the release of first-quarter earnings, looking for further guidance.

About the results

Bruker completed its purchase of ELITech in early May, and the deal is expected to add $0.08 to $0.10 per share to earnings by the end of the year. In the press release, the company further confirmed that non-GAAP operating margins exceed 20%.

In addition to that announcement, the company reported a 5% increase in first-quarter sales to $722 million, while organic growth was just 1%, a change that the company partially attributed to revenue of about $15 million that declined in the second quarter. The company raised its full-year sales guidance by sixty million to $3.32 billion, with adjusted earnings per share ranging from $2.79 to $2.84, as the increase is modest considering ELITech will generate approximately $100 million in revenue (as well as an unknown share of revenue from numerous smaller deals).

However, these figures exclude any contribution from the ongoing NanoString transaction and come after first-quarter adjusted earnings declined eleven cents to $0.53 per share amid strong margin pressure and moderate organic growth.

Despite the weaker quarter, the company maintained a full-year organic growth rate of 5-7%, which obviously raises the bar after weaker organic growth in the first quarter. Net debt was reported at $1.04 billion, but this was obviously ahead of larger deals as smaller deals were completed during the quarter at a total cost of $275 million. With the ELITech and NanoString transaction closing after the quarter, pro forma net debt is estimated at $2.4 billion.

Diving in numbers

During the conference call, management didn’t actually address the issue of potential dilution and the impact of leverage, although it was confirmed that gross leverage was around 3.5 times, with net leverage then obviously declining. While the company provided a slight increase in full-year guidance, the increase was actually smaller than might have been expected.

All in all, there were more questions than answers in early May as the company’s shares fell to the $70 level on uninspiring earnings forecasts and commentary. A few days later, Bruker completed the purchase of NanoString for $393 million, which effectively sent the stock back to the mid-1970s.

The real sensation occurred at the end of May, when the company announced the sale of 6 million shares as part of a transaction that is scheduled to end on May 31. Although prices have not yet been announced, the stock has dropped from the mid-70s to $66 as of this writing. This means gross proceeds are approximately $400 million, excluding the green shoe option. This means that pro forma net debt of $2.4 billion will drop to $2.0 billion, a significant difference.

The 146M share count will grow to approximately 152M shares, but a >10% share price decline at the time of share sale seems an overreaction to just 4% dilution while net debt will be significantly reduced. Against the backdrop of all this, investors appear to be disappointed with the lack of transparency and inconsistent capital allocation strategy (following a share buyback last year), but overall the appeal has increased significantly.

This means that the 28x earnings multiple in April has fallen to around 24x, while net debt is slightly lower, representing a net positive result. On the other hand, there are a lot of moving factors due to continued inconsistent management actions and unsatisfactory organic growth in the first quarter.

Bottom line

Given that Bruker Corporation was listed in the mid-1950s last fall, I’m drawn to the pullback. However, the question marks outweigh the relative appeal here, making me quite wary of buying this dip just yet.