Eurofins Scientific (XPAR:ERF, Financial) (6.1% of Sequoia’s capital at year-end, -41% USD total stock return in 2022)
Eurofins was among Sequoia’s worst performing stocks this year. We added modestly to our position during the year. On the surface, it would appear the business struggled. For full-year 2022, Eurofins’ total revenues are expected to be flat, with operating income likely down over 20%. However, these full-year 2022 results reflect a significant and, in our view, predictable unwind of high-margin Covid-related testing activity. Our best guess is that Eurofins’ revenues exclusive of Covid- related testing activity will have compounded at an annual rate of roughly 10% versus 2019 levels, with profits having compounded noticeably faster. In short, the business is progressing in line with our high expectations.
Eurofins is a worldwide leader in food, environmental, and pharmaceutical testing. The company is run by Gilles Martin, who founded the company in France in 1987 with just three employees. At the risk of generalizing, testing is a very good business: the service has a low cost relative to the end-product, the tests are important and in many cases required as a matter of regulation, and the customer relationships are sticky.
Eurofins may live in a good neighborhood, but it never coasts. The company is a very high performer when it comes to strategy, operations and capital allocation. For all its history, Eurofins’ strategy has remained the same: Achieve the #1 or #2 position in attractive testing markets across numerous verticals and geographies. The company drives operational excellence via a long -term mindset coupled with a highly decentralized organizational approach that both empowers and holds accountable its local lab leaders. As for capital allocation, the company has a multi-decade track record of acquiring both aggressively and sensibly.
At the current share price, Eurofins trades for approximately 19x expected EPS for 2023. We consider this an attractive price for a high -performing and resilient testing business that is run by a fully aligned founder-owner CEO and that ought to grow profits at a double-digit rate, from a combination of both solid organic growth and internally funded M&A, for many years to come.
From Ruane Cunniff (Trades, Portfolio)'s Sequoia Fund fourth-quarter 2022 letter.
