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Beckman Coulter Inc. $59 – New York symbol BEC

BECKMAN COULTER INC. $59 (New York symbol BEC; Conservative Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Average) makes equipment that hospitals and clinics use to detect substances in blood and other bodily fluids.

These machines help doctors diagnose patients for cancer, strep and other diseases. Beckman has installed more than 200,000 of its systems in about 130 countries. Overseas customers account for about half of its sales.

Beckman’s revenue rose steadily, from $2.0 billion in 2001 to $2.4 billion in 2005. Profits grew from $2.21 a share (total $141.5 million) in 2001 to $3.21 a share ($210.9 million) in 2004.

In July 2005, Beckman merged its two main operations into one division to improve efficiency. Restructuring costs totaled $34.8 million in 2005, but these moves will also help Beckman offset rising costs for steel, plastics and other materials.

New leasing policy spreads out sales

More important, Beckman changed the way it leases its products. Instead of an upfront lump sum at the start of the lease, it now lets customers pay in monthly installments over the term of the lease, typically five years.

The leasing switch hurts Beckman’s short-term profit growth, and earnings before unusual items in 2005 fell to $3.02 a share ($188.5 million). But monthly lease payments help make Beckman’s equipment more affordable to smaller clinics and research labs. A broader customer base will help improve the predictability of Beckman’s future revenues.

The company is also selling more perishable supplies, since many of its customers agree to buy a minimum amount of supplies from Beckman as part of their lease contracts. In fact, supplies and services now account for over 70% of Beckman’s total revenue.

New products will drive sales

Beckman continues to spend heavily on research, which helps it stay competitive in the fast-growing medical equipment market. Research costs in 2005 totaled $208.9 million (8.5% of revenue), up 4.5% from $200.0 million (8.3% of revenue) in 2004.

This spending has helped Beckman develop several new products that should fuel its growth in the next few years.

For example, new machines that can automatically analyze fluids help cut the testing time by about half, compared to manual testing. Since these machines require fewer technicians, they also help keep hospital costs down.

The company aims to improve its share of the medical research industry, particularly molecular and genetic testing. Right now this market is worth less than $2 billion, but it has enormous potential. Like its regular testing equipment, Beckman’s new systems automate the traditionally cumbersome process of separating and analyzing DNA fragments. These new machines should help scientists develop treatments for emerging diseases such as SARS and Avian Flu.

Besides research spending, Beckman is using acquisitions to spur growth. In 2005, it acquired two firms for $240.6 million.

While growing by acquisition is always risky, these purchases gave Beckman access to new technology and patents, and helped expand its share of certain markets.

This purchase will cut Beckman’s costs

In September 2006, Beckman agreed to pay $185 million for Lumigen Inc., which makes chemicals that medical researchers use to detect certain substances.

Beckman is Lumigen’s biggest customer (40% of sales), so owning Lumigen should cut Beckman’s longterm operating costs.

The company has just $59.4 million ($0.95 a share) in cash, so it will have to fund this purchase with new debt. Although that will increase Beckman’s long-term debt, which currently stands at $708.8 million, (0.6 times equity), it’s still manageable.

The company currently pays a $0.60 dividend, which yields 1.0%. Beckman will probably use its excess cash to pay down debt or buy back stock before raising the dividend.

Beckman’s stock jumped from $25 in 2002 to a peak of $73 in 2005. The stock moved down after it changed its leasing policies, but has regained some of this drop.

Low p/e for an industry leader

The company will probably earn $2.84 a share before one-time items in 2006. The stock now trades at 20.8 times that figure. It also trades at 1.6 times its revenue of about $38 a share. Earnings in 2007 should grow to $3.23 a share as it realizes the full benefits of its restructuring and acquisitions, and the stock trades at 18.3 times that estimate. That’s cheap for a market leader like Beckman.

Beckman Coulter is a buy.

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