Biotrace has a 14.4 price to earnings ratio with an estimated earnings per share increase of 44% in 2006 and then 14% in 2007. The estimated p/e next year is 10.2, so I thought I’d research it as a potential investment. They recently announced a new contract with NATO for 1.2m and the share price is off the highs of the year mainly due to the market decline in May. So, is this a good buy in opportunity?
Biotrace say they have a leading brand and their business is mostly durables which accounts for 85% of sales. It’s a business model similar to printer cartridges or Gillette replacement shaving blades i.e. your customer keeps on buying refills. They state that this should help stablise earnings for the future. The durables estimated growth is stated to be around 30%.
However, when I looked at this stock in more detail, Biotrace seemed to only increase sales by the acquisition route, during which time organic sales dropped in Europe. This started to worry me. If organic sales are dropping then they havn’t displayed a growing need for their product, either through an underperforming sales force or a poor product. I suspect it must be a bit of the product losing competitiveness and this seems bad. I had wanted to see the product sales growing, but they were effectively flat, and will likely be the year after, especially, if they don’t have an acquisitions to help it along. Also, they have taken out more debt to fund their purchases, so it could be a bit like borrowing money to buy increased earnings. A bit of a case of robbing Peter to pay Paul.
Effectively it hasn’t convinced me that it can achieve 30% growth in the future. If the sales had grown organically by 30%, we could have had a high achiever on our hands. But I don’t think it will so Avoid.