Eurofins Scientific Earnings: Maintaining Fair Value Estimate as COVID-19-Related Declines Absorbed
Narrow-moat Eurofins ERF posted solid first-quarter results with strong revenue growth despite the loss of COVID-19-related sales. Macroeconomic pressures across the industry may favor the firm once the dust settles, particularly in food, feed, and environmental testing, where it holds the market lead. We are maintaining our fair value estimate of $80 per share.
Revenue declined by 10.5% year over year due to the loss of revenue from COVID-19 reagents and testing. Excluding COVID-19-related sales, revenue grew by 7%. Management expressed optimism toward increased awareness around PFAS (per- and polyfluorinated substances), a non-stick material used in products like cookware, packaging, and clothing, now increasingly linked to toxicity. As the market leader in food and environmental testing, we believe the firm has a developmental lead in this area, though competitors may catch up before testing mandates become more robust.
On the cost side, the industry felt continued pressure from inflation around labor and supply inputs. The silver lining is that the current economic environment has made the industry more favorable for consolidation. Smaller laboratories with thinner margins are struggling to raise prices enough to keep up with higher costs. This is largely due to the nature of pre-negotiated contracts in the industry. In addition, the continued war in Ukraine has slowed food production and reduced testing volume across labs in Europe. With Eurofins’ five-year goal to complete its hub and spoke testing network, we’d expect to see increased M&A activity in the coming years.
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