Short sellers piled up bets against lab-testing company Eurofins Scientific SE four years ago, only to get crushed when the pandemic hit and gave the business a €2 billion boost to sales. Now they’re back.
(Bloomberg) — Short sellers piled up bets against lab-testing company Eurofins Scientific SE four years ago, only to get crushed when the pandemic hit and gave the business a €2 billion boost to sales. Now they’re back.
Almost 17% of Eurofins shares available for trading were out on loan as of Monday, up from about 1% a year ago, S&P Global Market Intelligence data shows. The reading, a proxy for bets that a stock will decline, makes the company one of the most-shorted members of the Stoxx Europe 600 Index.
Skeptics say the company’s cash flow and margins are under pressure from higher costs and competition. At the same time, years of debt-funded acquisitions by Eurofins founder Gilles Martin have made the company’s accounts hard to analyze, obscuring the fact that the lab-testing business is slow-growing in the absence of deals, they say.
“While in theory Eurofins has an attractive business model in a growing market, it has been built by stacking up acquisitions in such a way that it ‘polluted’ the reading of its profitability,” said Sarah Thirion, a Paris-based strategist at TP ICAP Europe.
A Eurofins spokeswoman declined to comment on the short position in the stock and the company’s margins.
To be sure, betting against Martin and his Luxembourg-based company hasn’t paid off over the long term. Since its 1997 initial public offering, Eurofins stock has returned an average of 26% annually versus 7.4% for France’s SBF 120 Index. Its market value has surged to €12.2 billion ($13.4 billion).
Martin, the chairman and chief executive officer, founded Eurofins in 1987 in France to commercialize technology created by his parents at the University of Nantes that helped ascertain the sugar content of wine. He and family members own about 33% of the shares and 66% of the voting rights in the company.
That control over the company played a role in the bearish bets pre-Covid. In 2019, short interest spike to 33% as investors criticized the debt-funded acquisitions, but also the governance of Eurofins. The founder and his family made up half of the board of directors, and the company paid them millions of euros in rent.
Eurofins addressed those governance criticisms by, among other things, adding independent board members.
Then Covid-19 hit, triggering unprecedented testing across the world and providing huge business to Eurofins. The stock peaked above €126 in September 2021, a year when its operating profit margin shot up to 28%.
Now short sellers see pressure on profitability without Covid-induced profits. Eurofins which initially aimed for margins of 24% in 2023, said in March it was postponing that target to 2027.
At about €63, Eurofins’ stock has fallen by half from its 2021 peak, and analysts don’t see it going anywhere in the short term. Their 12-month average price target is just above €64, and the majority of the 19 brokerages that follow the stock don’t recommend buying it.
Bernstein analysts began covering Eurofins last month with an underperform rating and a target price of €53. The company will need to keep doing acquisitions, further weighing on cash flow, the analysts, Harry Martin and Alice Rose Buckley, wrote in a report.
“We still see further downside as the market starts to better understand the dilutive impact of growth,” they wrote.
The company could go further in detailing its accounts and decentralizing management, some analysts say.
“It’s clearly detrimental for the company,” said Delphine Le Louet, an analyst at Societe Generale SA whose price target of €60.80 reflects a 7% discount to take into account governance issues.
Eurofins’ first-quarter sales last week reassured investors, lifting the shares by about 3.7% since then as analysts noted progress in organic growth. Martin, on a conference call after the announcement, said the company would continue to address investor concerns.
“We will be continuing to listen to our investors’ and analysts’ requests on topics like disclosure or anything,” he said.
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