An email that caught my eye recently was from a gentleman named Forest Albertson. He writes:

I have owned stock in Meridian Bioscience (NASDAQ:VIVO) for 10 or more years using DRIP for dividend reinvestment. My daughter says that I have too high of a percentage of my portfolio in VIVO, but it is hard for me to walk away from a stock that is good and pays back 70% to 80% of its profit to investors. Now the confession: I have approximately 40% of my portfolio in VIVO.

This email made me think there might be more to this stock than just it being a small-cap life science company that was churning out impressive earnings and revenue growth. I took a closer look at the company and even had an opportunity to speak with its president and chief operating officer, Jack Kraeutler. I'm still bullish on this stock as I have been in past takes dating to last November.

The business
For those unfamiliar with Meridian Bioscience, Kraeutler simplified its business purpose for me. "Everybody gets sick. The tools that we provide such as rapid diagnostic tests give the physician critical information to help choose the proper therapy," he said.

Its reagents business, which supplies rare biologicals to larger diagnostic companies, is in a great market position. This specific area of the market has been booming. Immucor (NASDAQ:BLUD), which sells blood typing and blood grouping reagents, recently announced a fourth quarter in which profits rose by 50% year over year, and its stock is up 54% over the past 52 weeks.

Diagnostics have begun to become the focus of merger and acquisition activity. A cash tender offer made earlier this month by Siemens AG (NYSE:SI) for Dade Behring Holdings (NASDAQ:DADE) now has shares of Dade trading up 82% over a year ago.

The performance
When we take a look at its five-year chart, we can see that the Fools who were fortunate enough to own Meridian Bioscience have had quite the run. Over this time period, the stock has appreciated close to 950%. The company continues to produce record revenue and earnings numbers and expects to see robust growth in these numbers for its immediate future. These returns have helped to vault Meridian into the Investor's Business Daily "100 Top-Rated Stocks."

I asked Krauetler how the company has achieved this success. "Discipline," he said. "We aren't crazy with our money. We look to invest it back into our business to optimize our returns to shareholders."

This disciplined approach has paid off in top-line and bottom-line growth. In July, the company reported record Q3 revenue that eclipsed its year-ago total revenue by 12%. Operating income and diluted non-GAAP earnings per share were up 37% and 33% respectively on a year-over-year basis. Meridian Bioscience management has additionally unveiled its expectation for double-digit revenue and earnings growth for FY 2008.

Can the company maintain this pace? Krauetler observed, "That's what people were asking 15 years ago, when we were an $11 million business. And there are many more opportunities out there today for Meridian Bioscience than there were back then."

The financial health
The company is in pristine financial health. With a current ratio of 6.5, the company should have no problem servicing short-term debt. Meridian also has no long-term debt obligations, yet it does have a borrowing capacity of $22.5 million if it decides to lever up in the future.

Looking at the company's income statement, a couple of key trends emerge. One favorable trend is that the company has maintained a relatively steady gross margin close to 60% for each of its past eight fiscal quarters, with its most recent quarter topping out closer to 65%.


Gross Margin Percentage

SG&A Margin %

Q3 2007



Q2 2007



Q1 2007



Q4 2006



Q3 2006



Q2 2006



Q1 2006



Q4 2005



Numbers from Capital IQ.

Another impressive trend has been the company's ability to also maintain a steady sales, general, and administrative margin. The trend has become even more favorable in its most recent quarters.

The future
So why does Meridian Bioscience continue to be a good investment? In short, the company continues to latch on to new opportunities. In early August, the company was awarded a five-year contract by the National Institutes of Health (NIH) to test and produce experimental viral vaccines. A few weeks later the company announced the start of phase 1 and 2 clinical trials for a vaccine aimed at preventing disease caused by parvovirus infections. These developments will help to shore up the company's life science business.

Meridian sports a price-to-earnings ratio of 47, which on the surface might make the stock appear to be an expensive investment from a valuation standpoint. Using its five-year earnings estimate, its PEG ratio of 1.7 doesn't make it look anywhere near undervalued either. But I think investors are willing to pay a premium above expected earnings because the company has a track record of beating projections, and given the high year-over-year profit growth it has been experiencing recently, I think projections are on the conservative side. 

"The real risk [for the company] would be doing something stupid at this point," Krauetler said. "We could triple the business in two years through frivolous acquisitions. We aren't interested in doing that, though. We are looking to manage consistent, sustainable growth."

The bottom line is that the stock has produced the returns of a Rule Breaker but retains characteristics similar to a Motley Fool Hidden Gem, such as its small market cap. Not bad characteristics to have in the market's choppy waters.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.