Bruker Corporation is a life-sciences company that has delivered returns of 20% annually for the last 15 years, comfortably beating the S&P 500. However, the share price has fallen -34% from its all-time highs. Watching companies that have performed so well historically fall that much is striking; as a result, below we will discuss whether we are facing a good opportunity or the drop is justified.

Business Model

Bruker manufactures advanced equipment primarily dedicated to imaging (e.g., magnetic resonance imaging, electron microscopes, and x-rays), analysis (chromatography, spectrometry), and diagnostics. We can divide the business into two parts:

• BSI: Includes the segments that develop the techniques mentioned above.
• BEST: Segment that develops advanced materials (superconductors). It represents 10% of sales.

By markets, the company has a 42% exposure to the academic and government market (ac&gov from now on), one of the life-sciences companies with the highest exposure to this end-market. The remaining 58% is divided into industrial, biopharma, microbiology, semiconductors, and food.

Competitive Advantages

Advanced equipment

Bruker is characterized by selling technologically advanced equipment, as shown by its prices. Bruker machines can cost upwards of $1M. In some markets where it operates, Bruker sells equipment ahead of the pack and is very difficult to replicate. For example, in the NMR market, Bruker holds a 90% market share and has only one competitor whose equipment is less advanced. In addition, Agilent had to exit the market in 2014 as it struggled to catch up with these competitors.

Capacity to innovate

Bruker’s competitive advantage is due to its unwavering commitment to innovate. This has allowed the company to carve out a great position in highly innovative niches.

Bruker’s competitive advantage is built around its capacity to create advanced equipment in highly innovative segments. However, this type of moat is not my cup of tea, as there is always an innovation risk.

Market Tailwinds

Bruker is exposed to several tailwinds that will boost its organic growth for the following years.

Aging of the population

The population over 60 has doubled since 2000 and is expected to increase by 70% by 2050 (tripling from 2000 to 2050). From the age of 40, every ten years of life, the chances of suffering from complex and chronic diseases multiply between 5 and 10 times. The average age of the world’s population is expected to increase to 36 years in 2050, against 31 in 2020 and 23 in 1980.

Biopharma

One of the solutions to the increase in diseases is biological (large molecule) treatments. These are more effective than traditional ones in curing conventional diseases and are used to treat more complex diseases (diabetes, obesity, cancer), which are impossible with traditional treatments. Currently, 60% of the drugs in development are biological, with a total of 20,000 in development against only 500 approved. Bruker’s advanced equipment will be needed to develop all these medicines.

“-Omics”

The so-called “-omics” refer to the study of genomics, transcriptomics, and proteomics. First, genomics refers to the study of what is written in the genome. Secondly, transcriptomics refers to the study of RNA, which copies DNA data and sends it to the cytoplasm, where proteins are generated. Finally, proteomics is the study of the proteins that are generated.

Without going into too many details (you can dive deeper into this fantastic article), in recent years, it has been shown that rare and genetic diseases, until now, untreatable, can be solved with those techniques. Effectively, they allow us to know the origins of complex diseases and how the body reacts to them. Therefore, medications and treatments can be created to prevent them and modify the body’s reaction to cure them.

Diagnostics

Again, the increase in the number of diseases and the development of new diagnostic techniques make this market very attractive. For instance, the molecular diagnostics niche, which is expected to grow in the HSD, is Bruker’s main end-market in diagnostics.

Electrification

In an increasingly electrified world (you can read my Texas Instruments article for more details), the use of semiconductors and batteries is increasing drastically. The semiconductor market is expected to grow at HSD, and the batteries market is at 10%. With its microscopic analysis technologies and advanced materials, Bruker’s exposure to this trend is a top drawer.

China Funding

The Chinese government has launched a funding program totaling $70B. According to JP Morgan, the markets where the most resources will be allocated are expected to be scientific research equipment (mainly ac&gov) and industrial manufacturing. Bruker’s high exposure to the AC&Gov and Chinese markets (42% and 18% of revenue, respectively) and the high percentage of income from equipment (70% of sales) mean that it could be one of the program’s primary beneficiaries.

Knowing the exact impact on sales is tough, but I don’t think it will be significant. Agilent’s management (another primary possible beneficiary of the program) comments that, even with this incentive, the growth of the Chinese market should slow down due to its maturity. While Bruker is exposed to higher growth markets, the impact should not be game-changing but rather an additional lever.

Based on these tailwinds and its competitive position, the company expects to grow organically between 200-300bps above the market, with organic growth between 6% and 9%.

Strategy

To take advantage of these tailwinds, Bruker has the following strategy.

Project 2.0.

First, to accelerate its growth, Bruker initiated the Project 2.0. strategy. Apart from the traditional business, which represents 44% of revenue and is expected to grow at MSD, the company focuses on six segments where they see high potential and represent 56% of sales. I divide them into two pieces:

1. Spatial Biology & “-Omics”: Analysis of units of life (cells, genes, proteins) to develop advanced medicines. The company expects these segments to grow at LDD.
2. Aftermarket, biopharma, molecular biology & nano/semi tools: The tailwinds of these sectors have already been mentioned. The company expects it will grow at HSD.

Innovation

As seen previously, the company has always trusted its innovative capacity to grow. The project 2.0 strategy implies betting on high-growth markets exposed to a lot of innovation. Therefore, success boils down to their ability to innovate, leading to an increase in R&D investments to 10% of revenue, up from 9% in the last decade.

Acquisitions

Historically, Bruker has made bolt-on acquisitions to expand into higher-growth markets. However, in 2024, the pace significantly increased, which is unsustainable in the long term. I expect that shareholders will have to wait a couple of years before returning to the usual pace of bolt-on acquisitions.

Financial Analysis

I have summarized the main financial metrics of the last ten years. For the adjusted metrics, I have added the amortization of intangibles and what the company calls other costs (restructuring and acquisition costs are not added as I consider them recurring).

What stands out:

• Average organic revenue growth of 5% (which has accelerated to 15% in the last three years) and EPS growth of 14%.
• Expansion of EBIT margins expanded from 10% to 17%.
• Very irregular FCF generation, mainly due to working capital management.
• High returns on capital, much higher than the sector average.
• Debt levels have progressively increased. In 2023, Net Debt/FCF was relatively high.
• Bruker operates with high working capital. The Change in Net Working Capital consumes, on average, 2.5% of sales each year. Very high days of inventory (calculated with sales as the denominator) stand out, too.

Management

Founder-led business

The founder and CEO since then, Frank Laukien, owns 27.7% (page 14) of the company’s shares (worth $2.6B). This makes Bruker a founder-led company with high skin in the game.

Compensation

Compensation could be better. Regarding the CEO, 60% of its salary depends on the long term, but only 45% for the NEOs’. Short-term variable compensation depends on revenue growth, adj. EBIT, adj. EPS, working capital improvement, and performance (determined by the compensation committee). Long-term compensation depends entirely on the compensation committee’s evaluations (pages 31 and 32), which doesn’t tickle my fancy. The committee considers experience, share price, and competitive strategy, among others, but no fixed objectives exist. Although the compensation is mediocre, the skin-in-the-game compensates for it.

Capital Allocation

The board says its objective is maintaining high ROICs and a conservative balance sheet. Historically, they have succeeded, but this year, things have changed. Let’s look at the policy in greater detail.

Acquisitions

Historically, Bruker has allocated 63% of FCF to acquisitions. The acquisitions were “bolt-on”, buying small companies between 2x and 4x sales to expand into attractive niches. However, since 2023, it seems that there has been a change in that framework:

• 2023: They bought PhenomeX for 3.5x sales ($108M), which is unprofitable (250bps dilution to EBIT margins in Q4 2023) and is not expected to break even until 2026.
• 2024: After deploying $150M in Q1, they decided to make two large acquisitions in Q2. On the one hand, Nanostring for $393M (2.5x sales), a company in the proteomics sector that went bankrupt and is expected to break even in 2026. On the other hand, ELITech for $940M (6x sales), a company in the molecular diagnostics sector. Overall, $1,500M was invested in M&A, equivalent to 6x last year’s FCF. As a result, they had to issue $400M in shares (4% of the market cap). I expect leverage to get to 4.1x Net Debt/EBITDA (9.8x ND/FCF).

These movements do not seem to comply with the capital allocation policy, neither because of the conservative balance sheet nor the high returns (I expect a ROCE of less than 10% for 2024). They are supposed to be transformative acquisitions, but I don’t buy into management’s arguments.

Dividends

Bruker distributes a marginal dividend, a payout of 10% that represents a 0.3% yield.

Buybacks

Since 2015, management has allocated around 70% of FCF to buybacks (deployed over 100% of FCF in buybacks and M&A which increased debt), reducing the number of shares in circulation by 12% (1.5% annually). However, in my opinion, due to the increase in debt, management will have to cut down on buybacks. In the following image, you can see that the timing of the buybacks is adequate.

Risks

Innovation ahead

Let’s see an example with “-omics”. “Genomics” is the most advanced and the least useful for scientific progress. The handiest information is found in proteins (proteomics). However, although “genomics” is advanced, there are about 20,000 genes. On the contrary, there are millions of different proteins. Furthermore, we can only access less than 2% of the data using current analysis techniques. Therefore, the TAM is huge, but there is also much room for innovation, which implies risk. Bruker is betting on highly innovative niches, and although they will grow faster, it is impossible to know who the winners will be.

Despite Bruker’s innovative prestige, reputation is different from success. I consider the risk to be significant because of the high non-recurring revenue. Effectively, 70% of income comes from equipment, making them more exposed to the risk of innovation.

Other players within the proteomics sector, such as Danaher (acquired Abcam), whose revenues are mostly recurring (consumables, reagents), are much less exposed to this risk.

Management’s behavior doesn’t convey confidence

There have been some situations in which the management team hasn’t complied with what they had stated.

• Capital Allocation: The latest acquisitions do not match the previously mentioned policy. Furthermore, integrating companies of such size is always difficult, and Bruker has experience with smaller deals.
• Guidance: In 2023, they guided for an operating margin of 21.5% for 2026. However, due to acquisitions (one of the companies was bankrupt), they have changed the guidance and now expect a margin of 19.5% for 2027. With higher capital invested (acquisitions) and 200bps lower margins, returns on capital will be much lower.

Debt

Debt levels are very high, and the company needs to generate FCF more easily.

Academic and government

High exposure to this market represents a political risk. In this regard, after years of sustained growth in financing, funding freezing is a possibility. For example, the Republican Party wanted to reduce the NIH budget significantly. If the Republican Party wins the elections, Bruker could be affected. In this regard, the company says that this risk is limited, mainly because, when selling advanced equipment, they do not expect significant cuts.

Valuation

The numbers result from my estimates, based on a 3-statement model. I have used an EV/NOPAT of 20x as terminal multiple, well below the historical average of 30x. I consider that such a high multiple is not justified, given:

• Declining ROICs: Although they are mainly due to acquisitions, these are necessary to expand into high-growth markets, in other words, to continue growing. Thus, it does not differ much from growth CapEx. Furthermore, I feel that operating in very innovative niches, the pace of acquisitions will have to increase (as has happened in 2024) to keep the organic growth pace. Therefore, I do not think Bruker will have 20% ROICs ever again. Even if organic growth increases, they will have to acquire to sustain it, resulting in lower returns.
• Terminal value: The terminal value is not too high due to the multiple risks and the nature of the niches it is expanding into (lots of innovation and constant changes). Likewise, the future is too uncertain. I don’t know whether Bruker will be a leader in its niches in the foreseeable future.

Additionally, due to the uncertainty, I have used a hurdle rate of 15%.

According to the model, Bruker wouldn’t reach my required long-term risk-adjusted returns, and its share price should drop another -37% (from $64.19) to become attractive.

Conclusion

Bruker is a decent company. Historically, it has had above-average growth, margins, and returns on capital thanks to its capacity to innovate and the leadership in its core business.

However, given the paradigm shift, I wouldn’t stand close to it until the dust has settled. Declining returns on capital aren’t of help either. Skin-in-the-game is the only silver lining in Bruker’s cloud, but isn’t enough to inspire confidence. Furthermore, the current valuation doesn’t justify the implied risks.

As a result, I rate Bruker a sell.