Should I pile into Abcam, down 15% today?

Why Abcam plc (LON: ABC) plunged today and what I’d do next.

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It’s not unusual for a company’s shares to fall on full-year results day, even if the headline figures look good, but Abcam’s (LSE: ABC) plunge this morning was quite dramatic. At one point the share price was around 35% lower than at the market’s opening, but has since recovered to sit around 15% down as I write.

The firm produces, distributes and sells “high-quality” protein research tools to life-science researchers who analyse components of living cells at the molecular level, which is “essential” in a wide range of fields including drug discovery, diagnostics, and basic research. Abcam reckons it serves around two thirds of the 750,000 life-science research organisations operating in the world today.

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Good figures

At first glance, today’s adjusted full-year figures look quite good. Revenue moved 7.4% higher than the equivalent period last year, and diluted earnings per share shot up just over 27%. The directors appear to be pleased too, and pushed up the total dividend for the year by almost 18%, which strikes me as a sign of their confidence in the outlook.

Indeed, the firm hit its growth targets for the year with revenue from recombinant antibodies up 22.3% at constant currency rates compared to a forecast of 20-25%. Revenue from immunoassay products also rose 25.4%, against an expected +20-25%.

Chief executive Alan Hirzel told us in the report that strong cash generation and a robust balance sheet justify the “continued investments” the firm is making in “our teams, systems and facilities to sustain our double-digit growth rates.” Meanwhile, the company expects the current year’s adjusted EBITDA margin to come in around 36%, which is lower than the 39% or so City analysts following the firm were reportedly expecting. I reckon that margin shortfall could be the cause of the share-price markdown.

It’s an age-old problem. In order to stay ahead of their games with growth, firm’s must invest. And when they invest in growth initiatives, there’s often a short-term hit to profits. However, as long as growth remains likely, share-price reversals like the one we are seeing today with Abcam can be decent opportunities for us to hop aboard a long-term growth story.

A quality outfit marked with a robust valuation

Abcam trades on a hefty price-to-earnings ratio close to 40, which has likely arisen because of the firm’s well-balanced track record of steady annual growth in revenue, earnings and cash flow. When valuations are riding high, the stock market can be unforgiving on earnings misses. But I wouldn’t write off Abcam yet. There’s no doubt that profit margins have been slipping lately, but I reckon the firm has every chance of making its growth investments work, which could boost profits down the line.

A high P/E rating is often a mark of quality earned by strong businesses and Abcam will not have lost all the attributes that made it great overnight. One indicator is that the shares are bouncing back up strongly today, which gives me confidence that there’s plenty of potential in the stock for investors from here. I think Abcam is one to watch closely with a view to buying into if the shares weaken again.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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