October 2022 marked 25 years since the IPO of Eurofins Scientific, a global leader in laboratory testing. During those 25 years only three companies across the globe have generated higher returns for shareholders; Apple, Amazon, and Monster Beverage.
Good question. The goodwill is a result of their serial acquisition strategy. Any purchase price for acquisitions over the asset value goes into goodwill on the balance sheet. So, they'll carry a lot of goodwill as long as they keep doing acquisitions. It's best to look at how much cash the business has generated versus how much cash they've laid out for their acquisitions to get a feel for the true economics of their strategy.
Cash flow metrics compared to accrued goodwill is reasonable. Let's switch it around. Imagine impairment charges have to be made which are generally seen as a bad thing because they are a hit to earnings and will most likely result in a sell-off.
Would this be a good opportunity for you to buy the dip since cash flow wouldn't be affected as it's a non-cash expense (cash flow took place at acquisition)?
I've looked at the deck...I didn't find anything overly compelling or concerning about the short thesis. It is a complicated corporate structure, but that isn't terribly surprising given the sprawling network of acquisitions all over the world. I tend to follow the cash, and absent some major underlying fraud, it's tough to fake cash flow (unlike earnings manipulation which can be quite easy). With Eurofins, you can clearly trace the cash in and cash out of the business to get a feel for the economics of the business model, and they appear attractive. Also, Gilles and his family own so much of the business I can't fathom why he would be putting the business at risk.
Generally if the cash flow is there and the incentives are aligned, fraud by management seems exceedingly unlikely. That said, I don't know how to handicap outright fraud (which is what the short is essentially claiming), so anything is possible.
The amount of goodwill on the balance sheet is what threw me off.
Do they plan on reducing the share of goodwill over time?
Good question. The goodwill is a result of their serial acquisition strategy. Any purchase price for acquisitions over the asset value goes into goodwill on the balance sheet. So, they'll carry a lot of goodwill as long as they keep doing acquisitions. It's best to look at how much cash the business has generated versus how much cash they've laid out for their acquisitions to get a feel for the true economics of their strategy.
Cash flow metrics compared to accrued goodwill is reasonable. Let's switch it around. Imagine impairment charges have to be made which are generally seen as a bad thing because they are a hit to earnings and will most likely result in a sell-off.
Would this be a good opportunity for you to buy the dip since cash flow wouldn't be affected as it's a non-cash expense (cash flow took place at acquisition)?
Have you guys looked at the short case on that one?
https://www.shadowfall.com/wp-content/uploads/2019/01/Eurofins_ShadowFall_Research_Report_FINAL_16_Oct_2011.pdf
I've looked at the deck...I didn't find anything overly compelling or concerning about the short thesis. It is a complicated corporate structure, but that isn't terribly surprising given the sprawling network of acquisitions all over the world. I tend to follow the cash, and absent some major underlying fraud, it's tough to fake cash flow (unlike earnings manipulation which can be quite easy). With Eurofins, you can clearly trace the cash in and cash out of the business to get a feel for the economics of the business model, and they appear attractive. Also, Gilles and his family own so much of the business I can't fathom why he would be putting the business at risk.
Generally if the cash flow is there and the incentives are aligned, fraud by management seems exceedingly unlikely. That said, I don't know how to handicap outright fraud (which is what the short is essentially claiming), so anything is possible.