- Campbell Brothers lifts earnings guidance at AGM
- Increase reflects strong lab testing volumes and benefits from recent acquisitions
- Valuation is an issue for some stockbrokers, but Macquarie upgrades to Outperform


By Chris Shaw

The laboratory services market remains strong if AGM commentary from Campbell Brothers ((CPB)) is any indication. Company management grabbed the opportunity to lift interim earnings guidance. Net profit for the first half is now expected to be in the range of $90-$95 million, which is comfortably above market estimates.

As an example, Deutsche Bank had been forecasting an interim profit of $84 million, while UBS had been expecting a result of around $88m. Estimates across the market have been lifted in accordance with the new earnings guidance.

JP Morgan has lifted its FY12 forecast by 5%, UBS by 6% and Deutsche Bank by 9%. Consensus earnings per share (EPS) forecasts according to the FNArena database now stand at 274.9c for FY12 and 316.8c for FY13, which compares to the 202.6c recorded in FY11 (the company has a financial year ending on March 31).

Two factors have contributed to the increase in earnings guidance according to Deutsche Bank. The first is high mineral sample volumes, which while probably near a peak, are likely to remain around current levels until a seasonal slowdown in December.

The second is the boost from recent acquisitions, as Deutsche notes the 1H12 result will include six months of contributions from Ammtec and three months from Stewart Group. The Stewart Group acquisition in particular should continue to boost earnings, as UBS points out the purchase has added a critical inspection and analysis business to the Campbell Brothers product offering.

UBS also suggests earnings have been boosted by the ongoing lab expansion program being undertaken by the company. On UBS estimates, return on capital employed in the lab capex program should exceed 100% in the first year.

A strong balance sheet implies further acquisitions are likely, something UBS suggests will provide ongoing support to both the quality and stability of earnings. Consensus earnings estimates imply a relatively strong earnings growth outlook in coming years (FY12 37.3% and FY13 16.5% on present consensus forecasts).

Along with increases in earnings estimates, brokers have lifted price targets, Macquarie pushing up its target to $50.58 from $46.45 and JP Morgan to $47.28 from $45.72. The consensus price target according to the database now stands at $49.11, up from $47.91.

Valuation remains an issue for some in the market, as despite increases to forecasts and targets, the likes of JP Morgan and Deutsche Bank continue to rate Campbell Brothers as a Hold. This reflects limited potential upside from current levels, particularly given recent share price strength.

UBS retains a Buy given its view strong earnings growth will support the share price, while post the AGM update Macquarie has upgraded to Outperform from Neutral. Macquarie offers a similar argument to UBS, suggesting earnings upgrades coming through support the current valuation and will see Campbell Brothers continue to trade at a substantial premium to the market.

Overall the FNArena database shows Campbell Brothers is rated Buy twice and Hold four times, suggesting the majority remains cautious about how much is already priced in and how much potential upside is left.

Shares in Campbell Brothers today are weaker and as at 11.15am the stock was down 19c at $46.96. Over the past year Campbell Brothers has traded in a range of $30.11 to $57.00, the current share price implying upside of around 3.5% to the consensus price target in the FNArena database.