A Top Growth Stock From The Motley Fool…

“Entering a golden age of research”

Dear Fellow Investor,

Mark Stones here, investment analyst at the Motley Fool UK. If you will allow me a moment, I’d like to tell you a little about how and why I invest. I also have some strong thoughts on what I think might be the optimal strategy that some investors reading this message should perhaps think about following for themselves.

First, a little about my own strategy, then, which is both simple and has produced results that I’m pleased with so far. The central part of it is this – I only ever invest in what I consider to be good companies. In my job as an analyst, I spend most of my working week carrying out research on what I feel are some of the absolute best businesses in the UK…

At the Motley Fool, we take pleasure in sorting the wheat from the chaff so you don’t have to.

The time, effort and dedication I place on understanding what makes a quality business (I like high returns on capital, and valuable brands, among many other things) should enable me to make better decisions regarding my own portfolio.  

My goal – which is as straightforward as my approach to investing in quality companies – is this, and this alone: I don’t want to retire poor.

In a recent study by Prudential, the insurer concluded that one in six people¹ will retire this year with an income that places them below the poverty line. That is a deeply alarming statistic, and by investing 10% of my salary into the stock market annually, I hope to avoid a fate that is, sadly, suffered by far too many.

It’s exciting, then, when I alight on a company that I feel might make a difference to my wealth – bringing me, step-by-step, closer to my long term goal.

It is with that exact same verve that I’m glad to bring to you what I think is a “world-class business with a remarkable track record”, that we’re calling A Top Growth Share for 2015.

Crucially, I feel I am obliged to tell you one thing: this is a racier-than-average investment, and probably isn’t right for most people.

In fact, I honestly believe that the average investor doesn’t need to invest in individual securities at all. Low-cost tracker funds tend to outperform expensive fund managers, and for that reason, they might be an excellent choice for the majority of investors.

But we go one step further at the Motley Fool, and our newsletter services are for a special kind of investor only. Our mission is to help the world invest better, and we try to demonstrate that by bringing members market-beating investment recommendations.

It’s a difficult journey, sure, but you might want to read the complementary investment report below for an idea of what that entails.

Sincerely,

Mark Stones
Investment Analyst
The Motley Fool UK

By Mark Stones

This research was originally published in The Motley Fool’s Shares 2015 report on 7^th January, 2015.
The numbers and text have been updated as necessary.

Price data as of 8^th June 2015.

About the company

Founded in 1998, Abcam (LSE: ABC) manufactures and supplies antibodies to research scientists working on treatments for diseases such as cancer. It has a catalogue of 133,000 products, making it one of the market leaders in the $2bn-a-year antibody market.

The firm’s genesis was from academic necessity: Abcam’s website not only provides scientists with the physical product they need to conduct their experiments, but the technical data too, saving researchers both time and money. Abcam is embedded at the heart of research into our unmet medical needs: work that is both important and enduring.

They say invest in what you know. I have never shopped for an antibody before. But hundreds of thousands of researchers worldwide order Abcam’s antibodies the way I might order my favourite coffee.

Investment thesis

In 2001, scientists unveiled the first draft of the human genome – the complete mapping of all our genes. Thereafter, in a transformative moment for healthcare, the goal shifted to understanding what is happening within each cell, and research spend shifted to the detection and analysis of proteins that might be modified to combat disease. The antibodies Abcam sells are a crucial tool in this process. There are tens of thousands of proteins in each cell, and scientists need different antibodies to study the protein that interests them down a microscope.

This area of research underwent a boom period. In the last decade, Abcam’s sales increased from £7m to £128m at an annual compound rate of 34%. I can’t help but admire what I believe are the hugely powerful economics behind Abcam’s business model. It has around 250,000–300,000 customers in its database, who might buy a batch of primary antibodies (at around £200) every few months. Abcam can charge a premium because of the unique data sheets it produces, detailing how the antibody will perform. Because of this, Abcam’s oldest products – with the broadest range of data – command the highest prices.

These proprietary data sheets would take years for competitors to produce, gifting Abcam with a difficult-to-replicate competitive moat. Although scientists need Abcam’s products to facilitate their research, and that need should not go away, it might change with time. That’s why new products are regularly added to the mix to keep up with the pace of scientific research.

Last year Abcam increased its range of products by 9%. That is below recent years, as the company increases focus on in-house development. It has ramped up R&D spending, while acquisitions – such as the £100m deal for California-based Epitomics – are another way to drive growth, giving Abcam a springboard into new markets. I believe that this should prove to be the right strategy, even though margins look slightly less healthy as a result.

Financials and valuation

At current prices, Abcam trades at around 26 times operating cash flow, a multiple that underpins the prevailing view that this is a world-class business with a remarkable track record and great growth prospects. We think that Abcam’s £1.1bn market cap has priced in high single-digit revenue growth, but the company’s valuation could be even higher if it can grow sales in excess of that.

You see, Abcam’s market share is just 11%, and if demand for its products accelerates – enabling it to take an even bigger slice of the market – then less risk-averse investors could yet enjoy some sizeable upside potential, despite the share price rallying since November. This is a company already priced for growth – we just think it might not be priced for enough.

Risks

Somewhere in the region of 80% of Abcam’s revenue is thought to come from government-funded research. Austerity measures, in the event an economy stutters in a key market, might negatively affect growth. But it says a lot about the strength of the business that in 2009, despite the financial crisis, Abcam doubled earnings and dividends.

I believe the greatest risk is that the market expects Abcam to grow considerably for the next few years. That is not a problem if earnings keep rising. If that happens, today’s valuation might end up looking cheap. But if the rate of expansion slows, then I doubt the market will take long to clip the company’s wings.

When I’d sell

If I bought Abcam it would not be a share I’d be looking to sell any time soon. Man hasn’t yet vanquished cancer. People are living longer. Populations are rising. I think it is inevitable that healthcare provisions will increase to enable researchers to confront these challenges, driving business Abcam’s way. So long as I had a diversified portfolio to offset any company-specific risks, I’d consider including Abcam as a racier growth share to hold for several years at least.

I might consider my position in the event of a radical departure in strategy – something along the lines of excessive acquisition activity, especially if this triggered large debts.

Disclosure: As of 8^th June 2015, Mark did not own shares of Abcam

References

1. “In its eighth annual ‘Class of’ study, tracking the future plans and aspirations of people who plan to retire this year, the insurer […] found that one in six (16 per cent) of the ‘Class of 2015’ will be retiring with expected incomes below the Joseph Rowntree Foundation’s (JRF) minimum income standard for an adequate standard of living for a single pensioner of £9,500.” ~ https://www.pru.co.uk/pdf/presscentre/no-pension.pdf

Sources: Abcam Annual reports 2011-14, Cap IQ

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