Lab testing firm Bio-Reference Labs (Nasdaq:BRLI) posted yet another quarter of impressive sales and earnings growth. Growth above 20% is nothing new to the firm and it is quick to point out that it is growing by internal means. In contrast, larger rivals have historically relied on acquisitions to expand. If future growth trends mirror past trends, the stock is a great value.
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Third Quarter Recap
Sales jumped 22% to $148 million. Bio-Reference pointed out that it does "not grow through acquisition like so many others in our industry," likely calling out larger rivals LabCorp (NYSE:LH) and Quest Diagnostics (NYSE:DGX), which have both relied heavily on acquisitions in recent years to grow. Instead, it has focused on organic growth and a steady stream of new diagnostic tests, including coming offerings of a "pre-natal program ... and plans to introduce a solid tumor genotyping program in conjunction with Massachusetts General Hospital." The company's core market is the Northeast and it estimates it is the fourth-largest lab-testing firm in the country, though hospitals, including HCA (NYSE:HCA) and Health Management Associates (NYSE:HMA) are collectively the largest lab testers in the U.S.

Expense controls helped boost operating income by 23% to $18.4 million while modest income tax expense growth helped send net income up by 26% to $10.1 million. Slightly higher shares outstanding tempered earnings per diluted share growth slightly to 24% as earnings reached 36 cents. (For related reading on the income statement, see Understanding The Income Statement.)

For the full year, analysts project sales growth in excess of 21% and total sales north of $555 million. They expect earnings of $1.14 per share for year-over-year growth of approximately 21%.

The Bottom Line
Growth above 20% annually is nothing new to Bio-Reference Labs. Over the past three and five-year time frames it has managed to grow both sales and earnings around 23% annually. Annual profit growth over the past decade has been even stronger, growing nearly 70% on average while sales are up more than 21% annually over this period.

Yet so far this year, Bio-Reference's stock is down more than 17% and is doing far worse than the market, as well as LabCorp and Quest. Smaller rival Medtox (Nasdaq:MTOX) is the only industry player in positive territory with about a 6% gain year-to-date. This has pushed Bio-Reference's earnings multiple down to below 17, which isn't cheap in absolute terms but is rather reasonable given the growth it has been posting.

Cash flow trends have been more uneven in recent years, but free cash flow has been positive in the past couple of years and the company has minimal debt levels. Overall, Bio-Reference Labs represents a compelling way to gain exposure to a rising need for lab tests and a secular trend to personalized medicine and subsequent increases in genetic and related esoteric testing. It is also posting the highest organic growth in the industry, though it's earnings multiple is at a premium to the larger players, which have forward multiples in the low teens. (Free cash flow is a great gauge of corporate health, but it's not immune to accounting trickery. For more, see Free Cash Flow: Free, But Not Always Easy.)

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Tickers in this Article: BRLI, LH, DGX, MTOX, HMA, HCA

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