Mesa Laboratories (MLAB): A “boring” small-cap stock that should continue to compound shareholder wealth

Note:  This and other stock investing related articles can now be found at my new site, hypefreeinvesting.com

09/04/2012

Mesa Laboratories is a small cap company that,

“…develops, manufactures and markets, high-quality process validation and monitoring instruments as well as dialysis calibration and verification meters, standard solutions and accessories that are relied upon by businesses worldwide… Mesa Lab’s products are used to assure product quality, control manufacturing processes, and to solve problems in niche markets in industrial, pharmaceutical, medical and food processing applications.”  Company site here.

In other words, Mesa Labs focuses on manufacturing and marketing highly technical products in niche manufacturing applications.   Outstanding execution in this relatively non-glamorous industrial niche has lead to excellent results for shareholders – Not based on hype or insane P/E ratios, but rather on solid corporate performance.  Check out the following table from a recent investor presentation:

Over the past five years earnings per share have increased from .31 to .60, and Book value per share has increased from 6.43 to 12.99.  A very low beta of .35 indicates that the company’s business is relatively independent of the overall market

Mesa’s growth has resulted from a combination of internal growth and the skillful acquisition of other highly specialized niche manufacturers.  Mesa’s stated corporate strategy is very shareholder-centric:

Keep in mind:  Revenue growth in a business that  is able to reinvest at an above average rate of return leads to the internal compounding of investor wealth -  This type of economic situation is an ideal position for long term investors.

As acquisitions play in important role in Mesa’s current and future growth, it is important to consider the companies acquisition strategy.  The following screen shot summarizes what Mesa  looks for in acquisition candidates:

In other words, the company is looking to acquire businesses with a strong competitive advantage similar to what Mesa has itself:  High barriers to entry, growing markets, and niche that is below the radar of larger, highly capitalized competitors.

One key component to the Mesa strategy is a relatively narrow focus on regulated markets.  The company has found that regulation creates specialized niches that are often too small to be trifled with by larger competitors, yet (do to regulation) have a steady and growing demand from end users.

Going forward, maintaining this highly disciplined acquisition strategy will be a major component of future shareholder returns.  Investors will need to monitor the quality of the companies acquisitions, as any move towards volume/commodity products (growth for  growth’s sake) or overpaying for even great businesses will ultimately put a damper on shareholder value creation.

I believe the odds suggest Mesa will continue to do a fine job of executing on its corporate strategy, and that the company has a long runway for future growth.   With a current market cap of around $160M (market price S47.5) I would not be surprised to see this stock move to a 350M+ market cap within the next five years.

As Mesa Laboratories continues to grow it will come onto the radar screen of both an increasing pool of institutional investors, as well as industrial conglomerates that might see it as a desirable acquisition candidate.  This should support and perhaps even enhance the earnings multiple that Mesa Laboratories trades at (currently around 20).

Catalyst:  Reasonably Valued small cap with rock solid corporate strategy and (more importantly) a rock solid record of execution on that strategy.  Investors should be rewarded as this company continues to grow EPS and book value over time.

Current long term strategy:  Own – add on dips – continue to monitor execution of corporate strategy – Sell partial position on any significant short term overvaluation.

-Disclosure: I own shares of Mesa Labs.  NAS Trading never receives compensation from companies or third parties.   This article is for information purposes only and is not investment advice.
-Investor presentation referenced above can be  found here (PDF).

-This article can now be found at here at my new web site that is all about long term stock investing.

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