CHARLES CRANE
FOUNDER
SCOTSMAN CAPITAL MANAGEMENT

COMPANY: Beckman Coulter Incorporated
TICKER: BEC (NYSE)
PRICE: $56.37
52 WEEK RANGE: $47.88-$70.66
MARKET CAPITALIZATION: $3.56 billion

Charles Crane is a founder of Scotsman Capital Management, a financial investment company for individual investors. Prior to this Mr. Crane was the managing partner and chief investment officer for Victory SBSF Capital Management, an investment management firm based in New York. Mr. Crane spoke with Katharine Herrup of The New York Sun about why confusion surrounding BEC might just be to its advantage.

What does the company do?

It makes systems that automate biomedical testing that can take place in hospital labs or in a regulatory lab. About 28% of the company’s sales come from the actual sales of systems. The balance comes from the supplies and service related to the big instruments that the company provides. Seventy-two percent of BEC’s revenue is recurring. But slicing the deck a different way, half of the sales are domestic and half are in the international market, which is a testimony that biomedical testing has a market all around the world. There are huge opportunities in countries like China and India – they have a middle class that consumes health care at a greater rate.

What is an example of the systems Beckman Coulter makes?

If you go to the doctor to get a physical, more likely than not you are going to get some blood work done. That blood will most likely go into Beckman Coulter machines.

What percentage of their systems go into hospitals and labs?

About 60% for the hospital side and 40% for the research and development side.

Who is BEC’s competition?

Beckman Coulter competes with Roche and J &J who make chemical systems, as well as Abbott which makes cellular systems. Nobody has the breadth of their line though. There are able competitors in specific segments in their market.

Why do you like the stock?

The stock has come under some pretty significant pressure in the past couple of months in the wake of management deciding to make some changes from sales type leases to operating leases in order to accommodate hospital customers and the budgetary constraints of those customers. This change has a noteworthy accounting effect in that it spreads out revenue and profit from a placement of a system over several years instead of booking it all up front. It did create a lot of confusion around the company and its earnings prospects and drove the stock from the low 70s to high 40s. We saw this as an opportunity to buy the stock, because the economics don’t change for Beckman. While it’s in transition, pockets of opportunities are formed.

Do you think the stock price will go back up after the transition period?

For the moment our price objective for BEC is for it to go back to its old highs in the low 70s. If the company continues to do reasonably well in its market place, that number will likely be revised upwards. BEC is not well understood and followed right now, so we will see.

How long will it take for the stock to get back up to its higher price?

We will need at least a couple more quarters of evidence to see if the tactical change in the way they sell their equipment will actually yield benefits in the market place. We are optimistic that the results will be favorable. So far, the change hasn’t hurt them. Whether it will lead to more placements of systems, that’s what we still need to assess.

Is it a good time to buy?

We’re still buying the stock at this price. We are buyers in the low 60s. We still think it’s moderately undervalued.

What are the risks?

The change in accounting proves to continue to confuse both investors as well as customers. Another risk is that their customers such as hospitals or biology labs or whoever needs these products find themselves in financial difficulty and can’t buy these systems. There are always execution risks that would be more specific to Beckman Coulter in terms of the company not performing well.