**Judges Scientific** ($JDG) is a serial acquirer from the U.K., and they call themselves a "buy-and-build" group. Acquired subsidiaries are in the scientific instrument sector (think electrophysiology equipment and soil/rock testing systems). David Cicurel founded the business in 2002 and still remains non-executive chairman today with around 9% of shares outstanding.
Today, Judges owns 23 active operating companies (despite 25 acquisitions total). The company operates primarily out of the UK, but acquires businesses abroad which specialize in exporting goods all around the world (North America, Europe, China, India, etc.).
Revenue Segments:
* **Material Sciences (\~53% of revenue):** Products involved in specialized testing, sample preparation, and surface modification equipment used by geologists, materials scientists, and advanced research labs. Some exampls - They make tools that help geologists study the Earth; They create machines that prepare tiny samples for looking at under super-strong microscopes; They have equipment that can put very thin layers of material on surfaces (kind of like painting, but on a tiny scale)
* **Vacuum (\~47% of revenue):** Focuses on high-vacuum chamber technologies, airless environment tools, and measurement devices critical to semiconductor manufacturing and specialized physics research. Some examples - They make machines that can suck out all the air from a space, creating a vacuum; They create tools to measure and control these airless spaces; Their equipment is used in making computer chips.
Acquisition strategy (disciplined and opportunistic!):
* **Subsidiary Profile:** High-quality market leaders in niches with decent margins, are decent exporters and have clear growth trajectories.
* **Valuation Consciousness:** Typically paying 3x to 7x EBIT (4-5x EBIT on usually).
* **High-Quality Buys Only**: "We will not deliberately buy anything that is not super-quality" - Cicurel on Podcast
* **Acquisition Discipline:** JDG has only made \~23 acquisitions in 24 years. They use a borrow -> buy -> pay off debt -> borrow model rather than issuing shares. Cicurel himself admits though that JDG could be bigger and have grown more by lowering their hurdle rates and making more acquisitions with debt and share issuance.
* **Target Sellers in a Transitionary Period:** Deals are often sourced from retiring founders who want to de-risk and cash out (but also protect their employees' jobs) over maximum valuation.
* **Decentralized Buy-and-Build Strategy:** Operating units maintain full day-to-day autonomy as in a typical decentralized model but JDG becomes involved with financial controls, executive coaching, leadership development programs, and support for R&D. HQ maintains a lean core team of roughly six staff.
Moat/Strengths:
* **Trust and Reputation:** JDg has a reputation trust and integrity in the markets in which they operate. Founders are more likely to sell to cheap to them than a new entrant.
* **Patents & Expertise:** Products are curated with specialized engineering expertise. Their portfolio has a growing set of patents.
* **High Barriers to Entry & Regulatory Standards:** Instruments typically have regulatory and research quality standards that makes it compatible with the downstream workflows of their customers.
* **Switching Costs & Integrated Workflows:** Customers (universities, corporate labs, research institutes) build experimental protocols around these instruments. Switching the workflow would be time- and money-intensive
* **Reputation for High-Quality Products:** Many instruments remain operational for over 20 years. I think this speaks for itself.
Tailwinds (8% organic growth over the long-term):
* **Growth in University Education:** More money is being spent to build universities to support increased demand for higher education. More universities = more labs = more research = higher demand for JDG instruments.
* **Continuous Process Improvement and Optimization:** Scientific research across academic, corporate, and industrial sectors aim to lead to new discoveries for iterative improvement over existing technologies. Control and optimization require measurement using JDG's instruments.
What's gone wrong recently (a perfect storm of events):
* **US University Budget Stagnation:** Funding cuts/delays in US research institutions caused a slowdown in university purchasing. The U.S. was over 25% of JDG sales and now is closer to 15%.
* **China Demand Slowdown:** Chinese government spending changes is now favoring domestic producers, meaning fewer orders to JDG.
* **Subsidiary-Level Lumps and Missteps:** Performance was hit by the lack of revenue from Geotek (recent acquisition, and the largest one) because their contracts are quite sporadic and lumpy. Historical larger acquisitions like Armfield and Scientifica also underperformed relative to initial targets, which is worrisome.
* **UK Taxes:** Increases in the UK corporate tax rate from 19% to 25% added an approximate £3m per year in expenses.
* **Management Transition Dynamics:** Chairman Alex Hambro retired, Founder/CEO David Cicurel transitioned to non-executive chair (and is ageing), and CFO Brad Ormsby announced his departure this past semiannual report.
Now... Valuation:
Historically, Judges Scientific traded at a free cash flow (FCF) yield averaging around 5%, recently spiking to 10% because of these dynamics described above.
Stock price has dropped by \~70% and is now at a 6.75% FCF yield. This valuation discount (around 35%) might be somewhat warranted because of the executive turnover, a \~21% revenue contraction in this most recent report, subsidiary challenges, higher debt loads (and now they are unprofitable on a net income basis), and a lack of acquisitions over the past two years.
While a 70% share price drop can look superficially cheap, it likely brings the stock closer to fair value (fair value is subjective) to price in the newer reality of previously unseen cyclicality and university budget lumpiness. But in the most recent report, order intake started to creep up!
I think that due to these recent dynamics, this could be the start of a turnaround in the business from the "perfect storm". If so, then now is a decent price to start acquiring shares. But the turnarounds are always hard to time, and this needs to be watched closely if you are thinking of investing soon. For long-term holders though, as I usually say, "*you'll probably be fine...*"