Investors have enjoyed a terrific ride since antibody supplier Bioventix (LSE: BVXP) arrived on the FTSE AIM market in April 2014. I first wrote about the firm that October when the share price was 680p, the forward price-to-earnings (P/E) ratio was 16, and the forward dividend yield was 3.9%. Back then, I thought the valuation looked modest “for such a fast-growing business.”
Strong performance
Fast-forward four years to today and the valuation no longer looks modest. The current share price of around 3,000p puts the forward P/E ratio at 30 and the forward dividend yield at 2.4%. I think this outcome is a good example of how a valuation re-rating can really turbocharge investor returns when a good growth story becomes accepted by the investing community.
Of course, Bioventix has earned its re-rating. Over four years, revenue is up over 125%, earnings are more than 200% higher, and the normal dividend is almost 100% higher. Throughout the period, the firm’s quality indicators have been mind-bogglingly good, and the whole set-up screams ‘special’, so I can see why many investors have clung tightly to their shares. However, there’s no denying that the now-racy valuation raises the stakes.
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Meanwhile, Bioventix keeps pumping out good figures. Today’s full-year results reveal revenue up almost 21% compared to the equivalent period last year, and pre-tax profit lifting 19%.
The firm’s debt-free balance sheet is a joy to behold and the cash pile rose by £0.8m to £7m. The money is more than the directors need to finance further growth, so they declared a special dividend of 55p per share, to be paid on top of a second interim dividend of 36p, itself up 16% on last year.
The company remains a quality outfit but forward earnings growth expectations are now the item that’s ‘modest”, cooling from the robust double-digit advances we’ve been seeing from the firm. If I still held shares in Bioventix I’d cash in my chips now to nail down my gains because I think the shares could drift lower as operational progress catches up with the valuation.
A decent long-term bet?
Instead of Bioventix, I’m tempted by FTSE 100 medical technology company Smith & Nephew (LSE: SN), which supplies joint replacements for knees, hips and shoulders; tools for minimally invasive surgery; advanced wound dressings; plus nuts, bolts, plates and other items for trauma surgery – all good stuff with apparent evergreen demand in today’s world.
The firm’s progress with revenue, profits and cash flow has been steady, albeit unspectacular, over the past few, which reflects in a keener valuation than we are seeing with Bioventix. At today’s share price close to 1,340p, the forward P/E ratio for 2019 sits at just over 17, and the forward dividend yield is a little over 2.1%. For that price, I see Smith & Nephew as equally exposed to the benefits of potential upside surprises as it is to downside risks, which is a fair proposition. I’d be happy to tuck some of the shares away for the long term.
