Thursday, August 14, 2008

Blank Graduation Diploma for Mesa Labs

At first glance, its razor –to- razor blade business model is working well for Mesa Laboratories (MLAB-$22.00). The electronic instruments and disposables maker reported an impressive 23.5% net profit margin on $20.4 million in sales in the trailing twelve-months ended March 2008. Mesa sells dialysis meters and calibration solutions as well as dialysis meter services. Its data logging and biological indicator products are used in the pharmaceutical industry.

Cash conversion (i.e. the amount of sales turned into cash flow from operations) was 23.6% in 2007.

Compared to the medical instruments and supplies sector, the stock looks cheap. MLAB is trading at a current PE of 15.7 times trailing earnings of $1.41 per share versus the sector PE of 22.3.

Sounds like a winner, right? Don’t hit the bid just quite yet.

For all its success in turning out profits and cash flow, it has taken Mesa twenty-six years to break the $20.0 million annual sales barrier. The company is also falling behind the rest of the industry in terms of growth, slowing to just 9.5% year-over-year—which is half the 20 percent average growth in the rest of the medical instruments industry.

Seeds of underachievement

The Company has put only $2.0 million into research and development in the last five years! Capital spending totaled $2.2 million in the same period. Make no mistake—Mesa has introduced upgrades to its product line, tweaking this feature—or that—to get better performance. However, there has been no major product introduction in some time, leaving open the door to competitors with better "mouse traps."

How were these seeds of underachievement sowed? An investor needs look no further than managements’ bios to answer that question.

Luke Schmieder - The Lost Years

"A man who has never gone to school may steal from freight car; but if he has a university education, he may steel the whole railroad." ~ Theodore Roosevelt

Luke Schmieder, Mesa’s current Chairman and CEO, has been with the Company since its inception in 1982. The five years before that he apparently tinkered around as a consultant on product development in the "medical field." He also worked for Cobe Laboratories, from 1970 to 1977. Investors are left to wonder about his early career accomplishments –if there were any.

At the age of 65, investors can expect at least some indication of what Schmeider was doing in the 1960’s. It might provide a clue to why Mesa has taken 26 years to reach $20 million annual sales.

We also are left to ponder about Schmieder's academic accomplishments, since his biography in Mesa's most recent proxy filing indicates simply that, "Mr. Schmieder attended Ohio State University and Ohio University taking courses in mechanical engineering and business management." Does no word on a degree mean Schmieder did not graduate?

Debra Fiakas does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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