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Value Line Coverage Initiation: Landauer, Inc. (LDR)
Value Line has recently initiated coverage of Landauer, Inc. (LDR) in The Value Line Investment Survey. The company, which was founded in 1954, operates in the dosimetry field, which is a fancy way of saying radiation monitoring. In its investor presentations, the company puts its business into fairly clear perspective by explaining that it monitors “radiation dose to workers”, “radiation dose to patients”, and “radiation dose accuracy.” The three quotes relate to its Occupational Radiation Monitoring, Medical Physics, and recently acquired IZI Medical Products operations, respectively.
Occupational Radiation Monitoring is the company’s largest division, offering monitoring products and services to hospitals, doctors, and the military, among others. The dangerous nature of radiation requires that individuals using or exposed to radiation monitor their exposure levels. Landauer provides and analyzes devices that do just that, with the vast majority of its sales provided on a contract basis. Medical Physics, the company’s second largest by revenues, provides therapeutic and imaging physics services to the medical community, including many of the same customers served by the Radiation Monitoring division. IZI Medical Products, meanwhile, is a provider of consumable medical accessories used in radiology, radiation therapy, and image guided surgery.
The company derives most of its business (about 75%) from the U.S. market, but has a global presence, including Europe and Asia. It has over 75,000 customers, touching the lives of nearly two million people. Recurring revenue accounts for about 90% of its top line because of the nature of its products and services. Moreover, it has had a 90%-plus customer retention rate in recent years, which makes its revenue stream highly stable. In fact, sales increased each year through the 2007 to 2009 recession.
The opportunity for this company’s growth and expansion is material because of its unique and important position in what is already a very prominent technology. Indeed, radiation is used in procedures from x-raying teeth to find cavities to treating cancer. Moreover, the use of radiation appears set to increase in the future based both on medical advances and the advancing age, and thus increased risk of cancer, of the Baby Boomers, one of the largest demographic groups in history.
Providing services to the medical field, however, exposes Landauer to a material list of regulations with which it must comply. Failing to meet the demands of these rules or not adapting to changing regulations would likely have a material impact on both the top and bottom lines. It is worth noting that Landauer is a large player in its business, but not a large company on an absolute basis, so a shifting regulatory landscape could pose material difficulty if the changes being made are large.
Many of the company’s products use patented technology for which it has the exclusive worldwide rights, providing solid protection against competitors. Many of these technologies were born of research efforts with medical research facilities and schools. This underscores the importance of research and development for Landauer. A failure to continue to innovate would likely lead to sales problems. Protecting patent rights, however, also requires vigilance on the legal front, which is an added cost of business, particularly in emerging markets where patent rights are not as well protected. Although these issues impact the entire company, the IZI division’s medical products are particularly exposed.
Landauer relies on a small number of facilities to manufacture its products, which increases the risk of a problem at a single facility materially compromising its operations. Potential issues include such things as production problems, but could also be caused by unannounced inspections by the FDA. Moreover, some of its products rely on a small number of suppliers (in some cases just one), posing a similar risk.
The company makes extensive use of acquisitions and partnerships to expand. Such transactions can quickly increase sales, regional exposure, and add new markets (such as the IZI transaction, which allowed Landauer to enter the medical products arena). Buying companies and creating partnerships, however, also comes with many risks. For example, as of early 2012, the company has a manageable, but relatively high level of debt. A large acquisition could be difficult to finance and have a material impact on the bottom line if debt were used. Any purchase not going smoothly, meanwhile, could distract management and quickly impact the bottom line because of Landauer’s debt load. Historically, however, the company has capably balanced acquisitions and growth. Partnerships, meanwhile, require material monitoring to ensure the company’s partners are living up to contractual obligations. On the international front, the company’s relatively small size virtually requires partnerships to facilitate its global expansion efforts.
Landauer is well positioned within the markets it serves, however, it still faces material competition. As an independent company, it may be at a disadvantage to operating units of much larger companies, which may be able to accept lower margins in their expansion efforts because of the financial support of a larger entity. Moreover, private competitors, regardless of size, may be more willing than a public company (like Landauer) to accept reduced profits in order to gain business. Such pricing issues could have a material impact on Landauer. It is important to note, however, that service quality is also a material factor in many of its businesses, so cost alone is not the only determining factor of business success.
Landauer is a large player in a fragmented market. It has a solid reputation and is acting as a consolidator. Moreover, it has historically provided shareholders with a steady and growing dividend payment. Investors looking to gain exposure to an interesting medical niche would do well to monitor Value Line’s regular quarterly reports on Landauer while also keeping an eye out for our coverage of late breaking news.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.