Mesa Labs (MLAB)

Solomon Select: December 2012

Mesa Labs (MLAB)

We think BI is an area of promise. No, we’re not talking about Better Investing or the publication Business Insider (although we like both of them) … this has to do with Biological Indicators. A year ago we watched as Bio-Reference Labs (BRLI) took a massive stock price hit as the short sellers seemed intent on driving a viable business into oblivion. During our diligence on the situation, we learned about the power and potential of body fluid analysis for diagnosis and prevention. With two sisters who serve as nurses, I’m also acutely aware of the need to verify sterile treatment.

Mesa Laboratories, Inc. develops, manufactures and markets, high-quality process validation and monitoring instruments as well as dialysis calibration and verification meters, standard solutions and accessories that are relied upon by businesses worldwide. From Fortune 500 companies, to high tech start-ups, Mesa Lab’s products are used to assure product quality, control manufacturing processes, and to solve problems in niche markets in industrial, pharmaceutical, medical and food processing applications. Mesa Lab’s products are characterized by technical excellence and superior industry reputations.

Growth, Profitability, Valuation

Our sales growth forecast for MLAB is 18.5%. We’re using 20% for the projected net margin. The median P/E for the period 2004-2011 is 15×. We’re using 16x for the projected average P/E.

Mesa Labs has delivered steady growth (allowing for a speed bump during the 2008-2009 recession) and a growth rate in the upper teens seems feasible.

Margins seem to be plateauing in the high teens — but a 17.5% forecast would be reasonable. Industry margins are 10% — so any study of MLAB has to gauge the sustainability of the higher profit margins.

The P/E ratio has been extremely consistent for a small company and could conceivably increase if growth rates and profitability levels are maintained as the company is “discovered.” A P/E ratio of 16-18x seems defensible.

At a stock price of $47.37, the projected annual return is approximately 16%. The quality rating is 88 (EXCELLENT) and the VL financial strength rating is B++.

Mesa Labs reminds me fondly of Neogen (NEOG). The business is similar and we discovered it using the Forbes Best Small Company listing for 2012. It’s a Royce (small company gurus) favorite and like Royce, we think Mesa Labs has the potential to continue to deliver.

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