Bruker Corporation (NASDAQ: BRKR) has seen a 20% dip since May, likely due to investors bracing for tighter market conditions and less productive business in FY’24-’25. However, this report suggests that BRKR is undervalued, considering its economic characteristics, competitive positioning, and market fundamentals.
Despite the market pricing a high degree of risk into the stock, BRKR’s economic performance supports a long-term view. It’s not a stock for short-term investors, but it could offer compelling value over a 5-year horizon.
Several macro-level factors are influencing BRKR’s investment outlook. The S&P 500 index has slipped below its 200DMA, and the ‘magnificent 7′ market leaders’ Q3 numbers will shape the market for the rest of the year. Shipping costs are cooling, which could be a tailwind for those with exposure to global markets.
The debate about the U.S. economy’s future is ongoing. Will we enter a recession? MRB partners suggest that the cost of capital may finally begin to curb economic activity in the U.S. and aggregate G7. They also warn that certain weak links could have a contagion effect on global markets.
BRKR is creating economic value for its shareholders, despite the recent selloff. The company’s returns on capital required to run the business are impressive. BRKR has surpassed our 12% hurdle rate, creating ~$15/share in economic earnings above this rate since 2020.
BRKR’s recent capital allocations provide insight into its future economic realities. The company has grown sales at a 3.2% compounding rate each period over the last 3 years, on stable operating margins of 28%. This growth has been accompanied by a $0.50 investment for each $1 in new sales, the bulk of which was dedicated to M&A.
BRKR could outpace the market’s expectations on growth and returns on capital, supporting a long-term view. However, technicals are not supportive of BRKR re-rating in the short term.
The business stock sells at 23.2x forward earnings and 17.2x forward EBIT. Both are premiums to the sector. Multiples are high, but you are buying a quality compounder that offers attractive and sustainable economics, with a value gap of ~49%, above the market’s required rate of return.
In short, a sharp pullback in BRKR’s market value has opened the funding window for long-term investors. BRKR is most attractive as a long-term (5-year+) proposition due to its high multiples and long-term business economics. The firm has scope to outpace the market’s implied expectations currently embedded into its stock price.
BRKR is a buy on these economic principles, eyeing a valuation range of up to $89/share over this horizon, and $65/share in the coming 12-24 months.