The scientific and technical-instrument subsector provides essential analytical and measuring tools to a wide array of industries – from biotechnology research and development (R&D) to the testing of equipment for 5G mobile-network communications and sub-micrometre metrology for precision manufacturing. This breadth helps insulate the instrument sector from cyclical downturns in any one of the areas it serves.
Take Britain’s Judges Scientific, for instance. Worth £400m, it is an interesting UK example of a broadly based instrument company. Judges’ product range covers university engineering laboratories, electron-microscopy accessories, fire-testing equipment, textile-testing instruments, computer-controlled testing of soils and rocks, and optical-fibre testing. The stock has quintupled since September 2016 – an example of several excellent investments in this area.
The global success stories
The global leader in this field is Thermo Fisher Scientific, whose market value is around $175bn, marking a threefold increase since 2016. Thermo Fisher Scientific’s products include analytical instruments, biotech equipment and consumables (items used up in medical testing, such as antibodies), drug-development services and general laboratory equipment.
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Agilent, an analytical-instruments group spun out of Hewlett-Packard, is the second-biggest with a market capitalisation of $37bn; its value has also almost tripled in the past five years.
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Other successful global brands include Shimadzu, a £7.5bn market-value Japanese company with a product range covering analytical and measuring equipment, medical systems and instruments for optical, hydraulic, vacuum and aircraft applications.
PerkinElmer is a $14bn US company supplying instruments, consumables and software for sectors ranging from biopharma and food safety to animal health and mining. Shimadzu’s shares are up 2.6 times since September 2016 ; PerkinElmer’s nearly 2.5 times.
Then there is Illumina, the world leader in genetic sequencing. The Covid-19 epidemic has shown how important that is for identifying different strains of virus. Illumina dominates the high-end sequencing market where machines can cost up to $1m. Another US firm dominating a niche is Intuitive Surgical. Intuitive makes robotic-surgery systems and instruments. A surgeon sits at a screen using controls to carry out keyhole surgery.
Intuitive has installed over 5,500 of its da Vinci robotic-surgery systems in hospitals worldwide and its machines have been approved for a range of different operations. Many surgeons have been trained on da Vinci machines and this, along with the large installed base, prevents potential rivals gaining a foothold in the market.
Our home-grown stars
In Britain there are three main classes of instrument company. Firstly, we have the well-established larger instrument companies with substantial overseas sales. They are typically in the FTSE 250 mid-cap index and tend to expand mainly through new products, but also make occasional acquisitions.
Secondly, we have smaller companies of this type with lower overseas sales and market caps below £500m and, thirdly, smaller companies that mainly grow by making several small acquisitions to expand their product range and market reach. The smaller ones are listed on Aim, the junior market of the London Stock Exchange.
Oxford Instruments, with a market cap of £1bn, Renishaw (£4.2bn), Spectris (£3.8bn) and Spirent Communications (£1.5bn) are good examples of FTSE-250 companies in the first category. In the second category we have EKF Diagnostics (£307m) and Kromek (£70m), with Judges Scientific (£400m) and SDI Group (£172m) in the third category.
Oxford Instruments provides tools to analyse and manipulate materials down to the atomic level; one application for its products is electron spectroscopy, a process helpful for identifying environmental contamination.
Renishaw is a world leader in high-precision metrology for manufacturing industries and healthcare, while it also specialises in three-dimensional metal-printing technology. Spectris provides instruments, test equipment and software for a wide range of industries.
Spirent specialises in the testing and security of wireless networks and infrastructure; it is crucial to the roll-out of 5G mobile-networks and devices. EKF Diagnostics focuses on diagnostic instruments both for central laboratories (ranging from clinical chemistry to infectious disease tests) and for point-of-care testing (for conditions such as diabetes).
Kromek makes a wide range of personal and environmental radiation detectors for different types of nuclear radiation. SDI Group’s products range from scientific digital cameras to electrochemical sensors for use in the food and beverage sectors.
So much for the pure plays. Beyond these shores there are several substantial listed companies with at least 50% of their total sales coming from instruments, notably Tecan of Switzerland (worth CHF4.7bn) and Mettler-Toledo International of the US ($26.7bn).
Mettler supplies the laboratory, industrial and food sectors with products ranging from microbalances (scales to weigh extremely small objects) to gas analysers. Tecan specialises in laboratory automation and molecular diagnostics.
Then there is JEOL of Japan, with a market cap of £1.3bn. It makes nearly 70% of its sales from scientific instruments. JEOL’s products include electron microscopes and electron-beam lithography for semiconductor manufacture.
A sound investment strategy
“Core-and-satellite” investment is a useful approach for the instrument sector. The core consists of one or more large, diverse companies that should be less affected by problems in any one subsector.
The satellites will be smaller and often less diverse companies that may offer greater rewards at higher risk. The relative proportions in your portfolio will depend on your risk tolerance. Of the companies mentioned above, Thermo Fisher is clearly a core company since it has such a large and diverse product range that it is becoming a “one-stop-shop”, or, perhaps, the “Amazon of research instruments and equipment”. Other possibilities include Shimadzu, Agilent and PerkinElmer.
A selection of diverse satellite companies might be made from larger companies such as Intuitive Surgical, JEOL, Oxford Instruments and Tecan, medium-sized ones such as Renishaw and Spirent ,or smaller ones such as EKF Diagnostics, Judges Scientific and SDI Group.
Renishaw’s share price rose by 19% to £69 in early March because the two founders, who together own 53% of the shares, have decided to sell. They say they will be careful about who they sell to because they want to maintain Renishaw’s culture, focus on R&D and commitment to staff and to the local community.
They may therefore decide to accept an offer from a suitable company that is not the highest and could be significantly below £69. Given this uncertainty, the shares have dropped back to £59 and, although Renishaw is an excellent company, it is difficult to value at present.
The top picks for your portfolio
We have narrowed down the options to 11 companies that should offer something for everyone. They have a wide choice of price/earnings (p/e) ratios, dividend yields and recent growth rates – the past four years – at varying degrees of risk, so most investors should find several of interest for their portfolios.
We will briefly review valuations and prospects for 11 of these companies – three core and eight satellite. In each case we give the price-to-earnings (p/e) ratio, dividend yield and revenue growth covering the whole four-year period between 2016 and 2020, which in many cases represents a combination of organic growth and acquisitions.
Thermo Fisher (NYSE: TMO) is the leading core option with a 2021 p/e of 20 and a current yield of 0.23% at a recent price of $446; revenue grew by 76% from 2016 to 2020. Agilent Technologies (NYSE: A) has a p/e of 31.5 and yield of 0.62% with five-year sales growth of 27%.
PerkinElmer (NYSE: PKI) has a yield of 0.22% and growth of 79% with a 2021 p/e of only 14. The figure has been skewed by the pandemic. This year’s earnings estimates were unusually high owing to strong demand for its coronavirus tests; the p/e for 2022, when less testing is expected, climbs to 20.
Among the larger satellite options, Intuitive Surgical (Nasdaq: ISRG) has a 2021 p/e of 56 with no dividend, but the p/e slips to 39.5 for 2023; four-year revenue growth totalled 61%. JEOL (Tokyo: 6951) has a 2021 p/e of 43 and yields 0.6%. The p/e falls to 25.5 for 2022; sales growth from 2016 to 2020 was 9%.
Tecan (Zurich: TECN) has a p/e of 40 at a recent price of CHF86, a yield of 0.6% and 2016-2020 revenue growth of 44%, while Mettler-Toledo (NYSE: MTD) has a price of $1,100 and a 2021 p/e of 37, pays no dividend and achieved growth of 23%.
Spirent Communications (LSE: SPT) is on a 2021 p/e of 16 at a recent price of 239p, while it yields 1.9%. Its five-year sales growth is 14%. Finally, there are three smaller instrument companies worth considering. EKF Diagnostics (Aim: EKF) is on a p/e of 33 for 2021 at a recent price of 67p, a yield of 1.5% and growth of 36%.
Then there is Judges Scientific (Aim: JDG) on a 2019 p/e of 40 at a recent price of 6,300p, a yield of 0.82% and revenue growth of 47% between 2015 and 2019. Finally, SDI Group (Aim: SDI) is trading on a 2021 p/e of 32 at a recent price of 175p, pays no dividend at present and recorded 2016-2020 sales growth of 189%.
