Based on the factors that Benjamin Graham considered in analyzing potential stock picks, Avantor is not a quality investment. Only investors with a high risk tolerance and a solid investment thesis on the stock will be interested in this large-cap Biotechnology company.
Avantor Is Probably Overvalued
Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:
√(22.5 * 4 year average earnings per share (0.27) * 4 year average book value per share (7.416) = $12.49
At today's price of $20.05 per share, Avantor is now trading 60.5% above the maximum price that Graham would have wanted to pay for the stock.
Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.
Impressive Growth, but Inconsistent Profitability and no Dividend
Avantor’s average sales revenue over the last 4 years has been $6.83 Billion, so by Graham’s standards the company is large enough to warrant an investment. When published in 1972, Graham’s threshold was $100 million in average sales, which would be the equivalent of around a half million dollars today. Needless to say, this is the least important of Graham's requirements, and may be overlooked by all but the most conservative investors.
More importantly, Ben Graham believed that a margin of safety could be obtained by investing in companies with consistently positive retained earnings. Avantor had negative retained earnings in 2018 and 2019 with an average of $224.7 Million over this period. So the company is not accumulating enough cash over time by Graham's standards.
Graham also required a 30% or more cumulative growth rate of the company's earnings per share over the last ten years.We only have 5 years of EPS on Avantor, so it fails the Graham test on this basis alone, but we still think it's worthwhile to look at its growth over the available period. In 2018, the earnings per share was $-0.94, while in 2022, it was $1.01. This give us a 207.45% growth rate during this period, which will satisfy Ben Graham's requirement if it continues on this trend.
We have no record of Avantor offering a regular dividend.
Negative Current Asset to Liabilities Balance and a Decent Current Ratio
Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. Avantor fails on both counts with a current ratio of 1.6 and a debt to net current asset ratio of -1.0.
According to Graham's analysis, Avantor is likely a company of low quality, which is trading far above its fair price.
| 2020-02-14 | 2021-02-16 | 2022-02-11 | 2023-02-14 | |
|---|---|---|---|---|
| Revenue (MM) | $6,040 | $6,394 | $7,386 | $7,512 |
| Gross Margins | 32.0% | 33.0% | 34.0% | 35.0% |
| Operating Margins | 9% | 11% | 13% | 15% |
| Net Margins | 1.0% | 2.0% | 8.0% | 9.0% |
| Net Income (MM) | $38 | $117 | $573 | $686 |
| Net Interest Expense (MM) | -$440 | -$308 | -$217 | -$266 |
| Depreciation & Amort. (MM) | -$399 | -$395 | -$379 | -$406 |
| Earnings Per Share | -$0.84 | $0.09 | $0.85 | $0.97 |
| EPS Growth | n/a | 110.71% | 844.44% | 14.12% |
| Diluted Shares (MM) | 401 | 583 | 598 | 679 |
| Free Cash Flow (MM) | $406 | $991 | $1,065 | $977 |
| Capital Expenditures (MM) | -$52 | -$62 | -$111 | -$133 |
| Net Current Assets (MM) | -$5,290 | -$5,001 | -$7,223 | -$5,951 |
| Long Term Debt (MM) | $5,023 | $4,868 | $6,978 | $5,923 |
| Net Debt / EBITDA | 5.19 | 4.18 | 4.97 | 3.85 |
