Avantor, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Avantor, Inc. is a global manufacturer and distributor of mission-critical products and services to customers in the biopharma, healthcare, education & government, and advanced technologies & applied materials industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Before we dive into the details, it’s essential to note that while much of this analysis relies on the provided financial documents and earnings call transcripts, we also use information from their publicly available websites. This information was used to improve the accuracy and completeness of the analysis. However, even the most thorough analysis is subject to change and cannot replace professional financial advice.

Business Overview Avantor operates as a diversified company serving various sectors with specialized materials, equipment, and services. Its business is broadly divided into three main areas:

  1. Laboratory Solutions: This segment encompasses a diverse range of products and services tailored for use in research, diagnostics, and pharmaceutical development. It includes chemicals, reagents, lab supplies, lab instruments, and testing and analysis equipment. This segment supports customers in the biopharma, education & government, and industrial industries.

  2. Bioproduction: This segment focuses on manufacturing customized single-use equipment, purification, and fluid handling technologies for the bioproduction market. These products cater to the biopharma, healthcare, and advanced technologies industries.

  3. Bioscience Production: This segment focuses on manufacturing and marketing biopharmaceutical products. They also develop, manufacture, and market specialty excipients, raw materials, and single-use solutions to biotechnology, pharmaceutical and diagnostics customers.

In essence, Avantor is a comprehensive solutions provider, encompassing products and services across the entire scientific workflow.

Industry Trends and Competitive Landscape

The industries in which Avantor operates are characterized by high regulatory standards, rapid technological advancements, and a need for continuous innovation. The company faces intense competition from other diversified distributors as well as from smaller, more specialized suppliers. Some major competitors in the life sciences sector include Thermo Fisher Scientific, Danaher, and Agilent, all of which have stronger moats than Avator. Competition is focused on customer relationships, brand recognition, and innovation.

Here are the major trends the company faces:

  • Growth in Biopharma: The increasing reliance on and demand for biologics is a key factor, creating growth opportunities in bioproduction and bioscience production sectors. This trend is accelerating with cell and gene therapies, which require specialized manufacturing solutions.
  • Trend for Globalization and Consolidation: Large companies are expanding globally, and smaller companies often merge, creating both consolidation and cross-selling opportunities.
  • Increasing Regulatory Scrutiny: There are increasing standards for materials, equipment, and procedures that are having a major effect in the industry, requiring companies to be proactive to meet requirements and demonstrate product safety.
  • Supply Chain Disruptions and Inflation: These have had a huge impact on the industry. Some companies have focused on securing the supply chain while others are focused on making efficiency gains to help combat input inflation. There has been price increases across the board for these companies.

Competitive Advantages (Moat Analysis) Avantor possesses some attributes that give it an edge over competitors:

  • Customer Relationships: The company has a large existing customer base of researchers, biopharmaceutical companies, and others that they serve, making switching to a competitor difficult and time-consuming. Also, most clients have worked with them for a long time, resulting in great relationships and strong connections.
  • Scale and Product Breadth: Avantor’s comprehensive product and service offerings across a wide variety of customer categories are an advantage. These help the company serve its customers more effectively, which creates more loyalty, which helps the company gain market share.
  • Distribution Network: Having a global distribution network makes it hard for competitors to enter the markets where the company has a significant footprint.

Given those points, Avantor scores a 3 out of 5 for its moat. It has a decent moat that is hard to break and may give them a good position in the future, but not as long as some other companies that have better competitive advantages.

Legitimate Risks That Could Hurt the Moat Several risks could potentially erode Avantor’s competitive position and financial standing:

  • Increased competition: More specialized suppliers are a big threat to companies like Avantor. If some competitors were to get more specific to some of their segments, they could take market share from them.
  • Technological disruption: Newer companies with breakthrough new products may challenge the status quo and take their customer base.
  • Loss of key contracts: If a key client were to change suppliers, that would have a massive impact on revenue. Given the reliance on key accounts, this could greatly impact their margins.
  • Supply chain challenges and cost pressures: Since they operate on a global scale, they are subject to supply chain disruptions and pricing pressures, which could reduce profitability.
  • Economic slowdown or recession: An economic recession would reduce demand for the products and services they provide, leading to lower revenue.

Business Resilience Avantor has certain aspects that allow it to recover better than others from troubles:

  • Diversified customer base: Having clients spread across multiple industries makes them less prone to volatility in one sector. If one sector fails, they can rely on other revenue streams.
  • Contractual agreements with some key customers: Having multi-year contracts with some key clients helps the company have a reliable revenue stream, making it easier to manage.
  • Ability to quickly adapt to changing technology: With a big presence in research and development they are able to spot new upcoming trends and adapt to them quicker than their competitors, this leads to sustained performance.

In spite of these strengths, it is impossible for them to be completely secure from market volatility and unexpected changes.

Financial Overview Here are some details on Avator’s finances:

Revenue Distribution:

The company’s revenues are distributed through its 3 segments:

  • Laboratory Solutions (63% of sales for the year 2022).
  • Bioproduction (27% of sales for the year 2022).
  • Bioscience Production (10% of sales for the year 2022).

The company has significant geographical diversity:

  • Americas (47% of 2022 Sales).
  • Europe (36% of 2022 Sales).
  • AMEA (17% of 2022 Sales).

Key Financial Metrics:

  • Net sales: $7.146 billion (Year Ended 2022)
  • Adjusted EBITDA: $1.571 billion (Year Ended 2022)
  • Adjusted EBITDA margin: 21.9% (Year Ended 2022)
  • Net income: 686.5 million (Year Ended 2022)
  • Free cash flow: $682.8 million (Year Ended 2022)

Analyzing Home Depot, Lowe’s and Avator, there is a notable difference in how their financials compare. The two retailers have much higher revenue due to the nature of their business (physical items), which involves higher turnover and lower ROIC, whereas Avator’s business has much higher profit margins with lower revenue and higher ROIC.

Balance Sheet Health:

Avantor has a solid balance sheet rating of a 4 out of 5. It has decent cash levels and a fairly high current ratio. Their debt is somewhat elevated as they have significant debt, but it is well within the manageable levels to prevent significant problems.

The debt-to-equity ratio is around 103% which is a bit high, but not concerning enough to be downgraded as a 3 on the balance sheet. Their overall solvency ratios are excellent.

Understandability:

Given the high level of technical complexity in the products and services the company sells, it is hard to get a complete picture of the inner workings of the company without a lot of research. Also, as a major distributor, a lot of its revenue is dependent on factors outside the company, such as commodity pricing, which can make the company’s finances a bit difficult to understand at times. Hence an understandable rating of 3/5 is appropriate for Avantor.

Recent Concerns / Controversies / Problems

Some of the areas of concern facing the company are:

  • Supply Chain: The company acknowledged that supply chain fluctuations and inflation has put pressure on their financial performance and reduced visibility into the future, these are also affecting inventories, which are increasing.
  • Foreign exchange rate impact: Fluctuations in foreign currency rates may negatively impact their financial performance. The company is very exposed to foreign currency because of the global nature of the business.

Management has expressed cautious optimism. They have taken steps to improve efficiencies and reduce costs, in order to combat the volatility and challenges faced. The management has also stated they believe their supply chain is “improving and stabilizing”.

Conclusion Overall, Avantor is a solid company with a good position in several different markets. Its moat is not the best but it is durable, and its management is trying to improve its business in order to create a more durable enterprise. While their balance sheet is reasonably good, their future will be impacted by their ability to improve in-house profitability and to navigate an unpredictable financial climate.