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Bear of the Day: Mesa Labs (MLAB)

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Mesa Labs ((MLAB - Free Report) ) is a $1.2 billion provider of quality control monitoring and validation instruments serving niche markets in healthcare, industrial, pharmaceutical, medical and food processing applications.

In early August, Mesa reported its Q1 FY21 results (ended June) and came out with quarterly earnings of $1.67 per share, missing the Zacks Consensus Estimate of $1.78 per share. This compares to earnings of $1.94 per share a year ago.

And Mesa posted revenues of $29.94 million for the June quarter, missing the Zacks Consensus Estimate by 5.55%. This surpassed year-ago revenues of $26.29 million by 13.9%, but the company has not topped consensus revenue estimates but once over the last four quarters.

The June quarter represented a negative earnings surprise of -6.18%. For the March quarter, it was expected the company would post EPS of $2.03 when it actually produced earnings of $1.29, delivering a negative surprise of -36.45%. This followed a 69% EPS miss in the December quarter.

This trail of declining profit growth has led analysts to revise their full-year estimates lower. For FY 2021 (ends in March), the Zacks EPS Consensus has fallen 25% from $8.14 to $5.99 in the past month.

Investor and Analyst Reactions

Despite this outlook, investors are not running away from MLAB shares, even after a $135 million secondary offering in June. Mesa priced 600,000 shares at $225 on June 9 and the deal size was increased from $100M to $135M and priced below the last closing price of $235.99. Jefferies, JPMorgan and Evercore ISI are acting as joint book running managers for the offering.

In a September 1 model update from Jefferies, analyst Brandon Couillard and his team wrote about MLAB as "a high-quality small-cap compounder with a defensive growth profile that is relatively insulated from the macro."

The analysts noted that while near-term demand conditions had been impacted by the pandemic, they continue to believe that improved execution under new management, who are former Danaher (
(DHR - Free Report) ) executives, would offer new stability and organic growth opportunities.

And with over $200 million of cash on hand, they also like the possibility of additional M&A as a likely catalyst for the stock. They maintained their $290 PT.

Growth Stock Growing Pains = Volatility

I was once an investor in MLAB shares in Q4 of 2018 where we bought the stock for my Healthcare Innovators portfolio because I saw it as undervalued near $180 vs its growth rates of sales and profits. We sold at $220 and I've looked now and then at the growth profile for a reason to get back in.

While the stock has offered plenty of trading opportunities between $210 and $250 this year and last, I can't recommend buying the shares now until the estimates have stabilized and started heading back up. The Zacks Rank will let you know.

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