This morning, Australian pureplay pathology provider Australian Clinical Labs (ASX:ACL) announced yet another earnings upgrade. When Australian Clinical Labs reported its results, it said it would make $48m – $53m profit in the first half of FY 2022. Today, it said it would make between $63.7 million and $70.0 million in the first half of FY 2022.
This has a number of ramifications for my analysis. First of all, it continues to vindicate my original thesis for buying Australian Clinical Labs shares. Second, and more importantly, it means I was wrong to take profits in Australian Clinical Labs recently.
As you can see below, at the time of writing testing levels in Australia seem to have flattened at around 200k tests a day. In fact, I had thought that maybe this meant testing had already peaked, hence my decision to take profits.
However, it turns out that the company’s forecasts had assumed that testing would drop away more quickly. Therefore, the current level of testing probably equates to a net profit of over $100m per year, putting the company on about 10x earnings (or significantly less) even at a share price of $5. Therefore, I was clearly wrong to think the momentum trade had played out. Now, I think there is (potentially a lot) more in this.
The big risk with trading Australian Clinical Labs shares is that at some point the extraordinary profits from covid testing may fall away, and profits will drop to a more normal level. On top of that, the private equity backers Crescent Capital still need to sell out, so I’m not sure how long the share price momentum in Australian Clinic Labs shares will keep going.
However, one thing is for sure. Even though I was early with this trade, buying at around $3.65, it seems I’ve underestimated the opportunity. If anything, I’m inclined to buy back some of the shares I sold at around $4.60! You can see all our Australian Clinical Labs stock coverage here.
Please remember that these are personal reflections about a stock by author. I own shares in Australian Clinical Labs and will not sell for at least two days after publishing this article (but I reserve the right to buy some). This article should not form the basis of an investment decision. It is an investment diary valuable only for the cognitive process it demonstrates. We do not provide financial advice, and any commentary is general in nature. Please read our disclaimer.
Update: October 11. Well, two weeks later and I can now no longer deny that the trend is for lower tests. So for now it looks like my trade thesis is over, and I’m going to be selling my ACL shares over the coming days.
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