With 'Tunnel's End' In Sight, Deutsche Upgrades Bio-Rad Labs

Investments To Bear Fruit

Analyst Dan Leonard expects the company's outsized investment in organizational infrastructure for over seven years to begin to bear fruit. The company's transition of all of its manufacturing and 70 percent of its sales to SAP enterprise resource planning system would enable it to reap the benefits of structural changes in Europe and wind down costs and duplicate investments associated with the SAP implementation.

Additionally, the analyst expects the move to help simplify IT infrastructure, and capture opportunities in pricing and procurement.

Margin Expansion Likely

Accordingly, Deutsche Bank forecasts a 150-basis-point expansion in EBIT, annually between 2018 and 2020. This compares favorably to the 50-basis-point annual expansion for peer companies having comparable revenue growth, the firm noted.

Near-Term Risk Mitigating

The firm now thinks near-term risk to numbers are mitigated, following the 2017 guidance and the consequent 12-percent reduction in Street estimates and the absence of any immediate hiccups associated with the SAP implementation in Europe. The firm believes the upward move from the 14 percent EBITDA margin would be sharp, although it views the communicated 2020 guidance of 20 percent+ as a stretch.

Deutsche Bank is of the view that the overall business health has improved, with the company's outsized exposure to Europe no longer seen as a liability. Despite the 60-percent run up in the past 12 months, the firm feels there is plenty of room for further mean revision, as the stock trades at a 2.5 turn discount to peers on forward EBITDA.

"Additionally, we're increased 2019 EPS to better reflect BIO's tax rate opportunity associated with moving its European headquarters to Switzerland," the firm said.

As such, Deutsche Bank upgraded shares of Bio-Rad from Hold to Buy and lifted its price target from $220 to $255.

At the time of writing, shares of Bio-Rad were rallying 2.57 percent to $223.83.

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