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Is Life Technologies Corp. (LIFE) Overvalued?

On April 15, Thermo fisher announced its acquisition of Life Technologies Corp. (NASDAQ:LIFE) for $13.6 billion plus approximately $2.2 billion in net debt. This report analyzes the growth of Life technologies and concludes whether LIFE is over- or undervalued.

Life Technologies Corp. (NASDAQ:LIFE)

About Life Technologies

Life technologies produces systems and reagents that enable and simplify biological research within academic, clinical, and commercial research applications.

First Quarter results and outlook

Revenue for the first quarter 2013 increased by 2.5% to $962.5 million over the $939 million reported for first quarter of 2012. However, the operating margin saw a dip by 80 basis points (29.4%) compared to the same period the prior year. The business output in Asia pacific grew 10% compared to 5% in Americas, 3% in Europe, and 1% in Japan. Asia pacific grew in all its business segments – research consumables, genetic analysis and applied sciences.

The management expects the revenue for the second quarter to be in the range of $950 – $955 million.

Life Technologies Corp. (NASDAQ:LIFE) has witnessed around a 60% increase in stock price in the last one year. The graph below demonstrates that it has vastly outperformed the S&P 500.

Source: Yahoo Finance

Competition and industry

Life Technologies is currently trading at a Trailing PE ratio of 31.32 in comparison to the industry average Trailing PE of 24.34[1]. Its competitors Meridian Bioscience, Inc. (NASDAQ:VIVO), Abaxis Inc (NASDAQ:ABAX) and Omnicell, Inc. (NASDAQ:OMCL) are currently trading at trailing PEs of 25.47, 16.04 and 36.9 with expected EPS growth rates of 8%, 17% and 32%, respectively. Life has a clear competitive advantage over its competitors on the following:

–Price: The economies of scale equips Life to sell the products at competitive prices

–Robust e-commerce platform : Life gets almost half of the orders[2] from the online platform

–Growth & Investment in Asian markets: Expansion into emerging markets such as China, India, Korea and Latin America is one of the key growth strategies. The recent acquisition of KDR biotech, a leading reagents distributor based in Seoul, Korea is just one example

–Innovation: Life has strong capabilities in next-generation sequencing and has wide portfolio of consumables for genomics, and molecular and cell biology

Relative Valuation

The regression of Trailing PEs of 24 companies in Medical Supplies Non-Invasive category against their expected growth in EPS provides the following:

PE = 16.4 + 65.74*Expected growth in EPS

The predicted Trailing PE of LIFE, by plugging its expected growth in EPS of 9.5%, provides a PE of 22.6 which is lower than the Trailing PE of 31.32. That signifies that LIFE is overvalued by 39%.

The scatter plot below demonstrates whether the stock Life Technologies Corp. (NASDAQ:LIFE) is cheap or too expensive. In order for the stock to be cheap, it should have low PE and high growth rate in EPS. The stock LIFE does not fit the criteria for ‘cheap stock’ as the median growth rate of the companies is 11% while the LIFE’s growth rate is 9.5%.

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