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A High-Tech Name With Plenty of Upside


Most investors think tech stocks consist of consumer electronics and the pieces that make them up, but Bruker Corporation is in all the right strategic sectors.

Bruker Corporation (BRKR) is a global provider of products, systems, and technologies used in life science, pharmaceutical, biotechnology, clinical, and molecular diagnostic research; chemical analysis; and superconducting applications.

The company's Scientific Instruments segment ("BSI"), which produced 93.2% of first-quarter revenue, makes advanced instrumentation and automated solutions based on mass spectrometry, magnetic resonance, gas chromatography, atomic force microscopy, stylus, and optical metrology, X-ray, spark-optical emission spectroscopy, and Raman molecular and infrared spectroscopy technologies.

BSI also makes field analytical systems for chemical, biological, radiological, nuclear, and explosives (CRBNE) detection. Customers include pharmaceutical, biotechnology, and molecular diagnostic companies; academic institutions and non-profit organizations; government agencies; and nanotechnology, semiconductor, chemical, cement, metals, and petroleum companies.

The remainder of Bruker's revenue was derived from its Energy & Supercon Technologies ("BEST") segment, which produces superconducting materials and devices based primarily on metallic low-temperature superconductors and ceramic high-temperature superconductors. These products are used in magnetic resonance imaging, nuclear magnetic resonance, fusion energy research, and in ceramic high-temperature superconductors for fusion energy research applications.

Shares initially rose 7% on the strength of the better than expected Q1 earnings. Up until a few weeks ago, the stock had held on to most of this gain.

However, shares of Bruker have fallen 13% over the past 10 days. Usually a decline of this magnitude in such a short period of time is the result of materially disappointing news, such as a reduction in outlook or an unfavorable change in industry conditions.

That does not appear to be the case here, since my firm could not find any meaningful justification for this abrupt sell-off. The only news of note was the award of a contract for 40 additional IPDS-LR hazardous gas detection systems by the US Navy worth $4.8 million, which we view favorably.

This is not to say Bruker doesn't have any concerns. For more than a year, life science equipment and products makers have been under pressure on speculation that the federal deficit will limit the amount of funds eligible for research programs by the National Institute of Health (NIH), which is responsible for a substantial portion of industry sales.

NIH's budget for fiscal 2012 is $30.69 billion, flat from a year ago and lower than the $31.74 billion originally proposed by the Obama Administration. Given that the proposed budget for fiscal 2013 is also $30.69 billion, the final approved budget may come in below this level, resulting in a decline in funding.

The other major concern is the company's heavy reliance on Europe, which represented 41% of total 2011 revenue. But these concerns are not new. They were responsible for the 40% drop in share value from July 28 through August 8 last year-a decline from which Bruker has not come close to recovering from.

It has made an effort to diversify away from academic, government, and non-profit organizations, which represented 64% of revenue versus 72% the prior year. Moreover, NIH only represents about 5% of the company's revenue on a standalone basis. Thus, we do not expect this issue to have a major impact on Bruker's operations.

While we view Europe as a bigger concern, Bruker has been reducing its exposure to the region by expanding business in other international markets. As noted above, Europe produced 41% of sales in 2011, but this is down from 52% three years ago. Moreover, much of the company's recent growth in the region was derived from Russia and Turkey, which are not part of the eurozone.

Over the near term, business should remain strong-driven by steady growth in its scientific instruments business and the substantial boon in orders Bruker is currently enjoying in its BEST segment. This increased order activity has already resulted in record backlog, which stood at $219.4 million at the end of Q1, up $47.3 million or 27.5% from the prior year.

That figure is probably closer to $255 million now given recent business awards, such as the large-scale license and technology transfer contract for its high-temperature superconductors from Rosatom, a Russian atomic energy company.

Editor's Note: This article was written by Taesik Yoon of Forbes Investor.

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