Brooks Automation (NASDAQ:BRKS) shares are tumbling despite reporting better than expected third-quarter financials. The company gets a lot of its revenue from its life sciences business and that business is expanding rapidly. Is now a good time to add this stock to your portfolio?
Leaping into life sciences
Most of the company's revenue still comes from semiconductor capital equipment that helps automate fabs, control contamination, and keep things cool with cryogenic pumps and cryochillers. However an increasingly large share of revenue is coming from its fast-growing life sciences business that provides end-to-end cold storage management of consumables, including samples.
Brooks Automation has invested $290 million in life sciences acquisitions since 2011, not including its $66 million acquisition of 4titude in October. As a result, Brooks' life sciences business offers sample management solutions in temperatures of ‑20°C to -150°C, as well as solutions addressing the collection, transportation, processing, storage, protection, retrieval, and disposal of biological samples. The 4titude acquisition expands the company deeper into scientific consumables for biological sample materials in genetic research.
So far, Brooks Automation's investments have paid off. Its fiscal year revenue has increased to $693 million from $451 million in fiscal year 2013 and based on its fiscal fourth-quarter results, business is still growing at a healthy double-digit rate.
In the quarter, total revenue of $182 million increased 15% from one year ago as life sciences revenue increased 39% to $44 million and semiconductor revenue increased 10% to $138 million. The performance in the quarter was weighed down by a 5% sequential decline in semiconductor sales, but life sciences revenue sequential growth of 20% offset that headwind.
Gross margin improved 1.5% to 40.9% quarter over quarter. Lower production costs and a better revenue mix helped semiconductor gross margin increase to 42.3% in the fourth quarter from 40.5% in the prior quarter. Meanwhile, life sciences adjusted gross margin inched up to 38.2% from 38% in the prior quarter.
The company spent 10% more on SG&A and 7% more on research and development in the quarter, so its non-GAAP operating expenses were $49 million. As a result, adjusted net income was $25 million or $0.35 per share.
For the full fiscal year, revenue was up 24% to $693 million and 22% of that growth was organic. Life sciences revenue was $149 million, up 38%, and 27% of that growth was organic. Semiconductor revenue was $544 million, up 20%, and adjusted net income was $1.23 per share, up 163% year over year.
Eye on the future
After its performance last quarter, the company expects fiscal first-quarter revenue of between $182 million and $188 million and adjusted earnings per share of between $0.27 and $0.32 per share. Industry watchers estimates are for sales of $178 million and $0.29 per share in earnings.
The company's short-term outlook, however, isn't why you might want to consider buying this stock. Instead, its the opportunity for long-term growth associated with serving the life sciences market. Medicine is increasingly moving toward personalized and precision medicine and as that happens, there will be a greater need for managing the life cycle of samples. The company's life sciences products position it nicely to benefit from growing sample volume, and as a result, Brooks Automation estimates its life sciences sales will eclipse $200 million in fiscal year 2019, without including any benefit from 4titude or any other future acquisitions. Its key customers already include diagnostic companies such as Illumina's Grail and Exact Sciences and it's biopharma client list is a who's who of top companies, such as AbbVie, Celgene, and Johnson & Johnson.
The life sciences tailwind makes this company particularly intriguing if the semiconductor business continues chugging along. It's the market share leader in vacuum automation, contamination control and cryogencic pumping and cooling, so it should benefit as long as electronics get increasingly sophisticated.
In 2019, Brooks Automation expects that life sciences will account for 25% to 30% of sales and the segment's operating margin will be 1% to 3% higher than margin in its semiconductor business. If management's right about that forecast, then earnings-per-share growth could make this an intriguing life sciences stock to pick up on sale for the long term.
Todd Campbell owns shares of Celgene. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Celgene, Illumina, and Johnson & Johnson. The Motley Fool has a disclosure policy.