TAKING STOCK

Dear Mr. Berko:

A friend of mine works for a small company called Bio-Reference Laboratories that trades over the counter. He tells me that this company is growing like mad and that its earnings are getting better every year. The stock is down under $5 from $12 a share, and my friend says that he is certain the stock should at least be able to double by the end of the year.

My friend is not just an enthusiastic employee of the company; he is a manager and can easily see how well Bio-Reference is doing. He just bought 325 shares.

I would appreciate your answer if you think it would be a good investment to buy 200 shares. I have over $3,500 of savings, and even if the stock just goes to $7, I would make $400, which is better than I’m getting in my savings account.

G.P.  Fort Walton Beach, Fla.

Dear G.P.:

Bio-Reference Laboratories Inc. (BRLI-$4.50) is a clinical testing laboratory serving hospitals, prisons, clinics, other health-care facilities and physicians primarily in the New York area. It’s a profitable, fast-growing, easy-to-manage business. The doctor, hospital, etc. takes a blood sample, a stool sample or a skin sample and notes your name and desired test on the container. A BRLI’s driver picks it up the same day. Tests are performed at BRLI’s facilities in Elmwood Park, N.J., or Valley Cottage, N.Y.

The company offers more than 4,000 diagnostic tests, such as blood and urology analysis, hematology services, pap smears, toxicology, serology and blood chemistry tests. Routine test results are reported back to the health-care provider within 24 hours, and the company’s doors are open 24 hours a day, seven days each week and 52 weeks per year.

BRLI is a wee company, but it has enjoyed excellent growth. Revenues in 1999 were $53 million, but they’ve grown each year to an expected $106 million this year. Compared to the competition, $106 million is almost a laughing matter and barely butters the bagel. BRLI lost 68 cents a share in 1999, though steadily increasing revenues allowed BRLI to shuck its losses and post record profits every year since. In 2002, the company earned 39 cents a share on $96 million in revenue, and this year management believes it will earn 44 cents a share on revenues of $106 million.

Management reckons that revenues can grow by 15 percent to 18 percent annually and that over the next five years net profits could increase by 22 percent to 25 percent each year. This stock trades at 10 times expected 2003 earnings, which is a comfortable multiple. Last year, with earnings of 39 cents a share, BRLI traded at $12, which is an uncomfortable multiple of 30. BRLI has negligible debt and a book value of $1.40. There are 11.5 million shares outstanding, giving BRLI a small, almost humbling market capitalization of $55. Heck, Michael Jackson made more money than that last year from royalties, record sales and personal appearances.

BRLI services a busy and highly competitive environment. But the company has excellent growth potential because health-care providers, ever fearful of being sued, will continue to ramp up the numbers of test procedures they order for their patients. Its valuation ratios, growth rates, financial strength and profitability ratios compare favorably with industry averages. However, management’s effectiveness – such as return on assets, return on investment and return on equity – substantially lags behind industry averages. That kind of gives me cause to pause.

Last year BRLI had $4.9 million in net income, and the chief executive officer and chief financial officer bled $2 million in compensation from the company. The stock appears to be modestly underpriced but deserves to trade at 10 times projected earnings, which would put shares right at the $4.40 level.

The $4.1 billion revenue Quest Diagnostics (DGX-$55), which is down from $96 last year, trades at 11 times next year’s projected earnings of $4.90. Meanwhile, Laboratory Corp. of America (LH-$25.50), with $2.6 billion in revenues (and down from $54 last year), trades at 9.5 times next year’s earnings of $2.72. Revenues and earnings of both of these companies have increased at the same rates as those of BRLI.

Considering the enormous growth potential in these issues, I think the entire lab-testing group may be underpriced (historically), as are many other issues in the market. BRLI will turn around when the market turns around.

The only catalyst that would sooner turn stock back up would be whispers of a merger or buyout. Some drug companies, seeking new avenues to expand their revenue base, might be interested in this kind of a business. BRLI is a growth stock in a growth industry, but I think you’ll have to wait for a growth market to push stock back up.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or visit his Web site at www.berkoradio.com.  (c) Copley News Service  Visit Copley News Service at www.copleynews.com.