Brooks Automation (AZTA 3.83%) knows how to stay cold. Among other things, it engineers cryogenic equipment -- machines that keep drug samples super cold for storage and purity purposes. After years of hot-and-cold spells for its shares, Brooks has been taking small but frequent steps away from its legacy semiconductor business, and into its future as a life sciences company. These could be the early days of a major transformation for Brooks Automation -- and the thawing of a once-frozen stock.
The legacy business
Brooks Automation, founded in 1978, cut its teeth serving large semiconductor companies -- operations that still represent about 56% of the company's revenue. Brooks's niche in the large and complex semiconductor world are "vacuum robots" ... but not in the sense of iRobot's Roombas. These robots operate in a vacuum -- as in, "the vacuum of space" -- to prevent dust and other impurities from finding their way into the nooks and crannies of computer chips.
This business is still strong. Its revenue grew 11% year-over-year in the first quarter of 2020. But competition is fierce. Brooks lists a number of large companies, particularly Japanese consortiums, as its primary competitors on its annual report. The company also lists its own customers as competition, since many often chose to build and implement their own automation solutions. It's no wonder then, that Brooks has been intentional in its strategy of diversifying away from the semiconductor industry and into the fast-growing life sciences business.
Over the last five years, we've seen Brooks's shift toward life sciences through acquisitions such as CoolLab, BioBank Pro, BioSpeciMan, and six others. Brooks is quickly becoming one of the primary providers of cold sample storage, and associated services such as drug and genomic research. In its 2019 annual report, management addressed Brooks's evolution, saying that a move and focus into the faster-growing life sciences industry provides more opportunities and more stability than relying solely on its semiconductor business.
One acquisition in particular shows real promise. In 2018, Brooks purchased genomics research service GENEWIZ, which operates worldwide labs that offer researchers a large variety of genetic information, for $450 million. Want to know the exact RNA sequence of COVID-19? GENEWIZ can help. Brooks's life sciences revenue posted organic growth of 11% year over year in the most recent quarter, but the GENEWIZ business notched 25% in the same period.
It's true that the COVID-19 pandemic spurred much of that activity -- but that upsurge might not be a one-off for the company. Brooks is using the rise in demand and addition of new products to expand its capacity for the future. New projects serve as tryouts for potentially long-term customers. CEO Stephen Schwartz explained, "Customers challenged us ... with projects that gave us opportunities to demonstrate our incredible scientific acumen, collaboration, fast turn, and high quality results in support of their essential research." Investing in GENEWIZ now will help Brooks capitalize on this surge. The CEO is prioritizing retaining the GENEWIZ team, and growing their market share by focusing on serving customers.
What to look for
Brooks's books show stability and opportunity, with nearly $200 million in net cash. The company currently pays a $0.40-per-share dividend, which comes out to $29 million over the past year. For some companies, $29 million is a rounding error. But Brooks may still want to rethink dividend payments and focus solely on investing in the life sciences opportunities, expanding GENEWIZ capacity, or even funding future acquisitions.
So long as Brooks continues to show double-digit growth in GENEWIZ and its broader life sciences business, this once-cold stock stands a good chance of heating up once more.