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Morningstar | PerkinElmer's Business Looks Less Attractive Than Peers Despite Emerging Market Performance

With myriad acquisitions and divestitures in the past decade, PerkinElmer has been in a constant state of evolution. While the firm’s transformation reduced exposure to cyclical markets and increased focus to environmental and human health offerings, nonstop business shuffling has yet to produce sustainable returns on capital investment. PerkinElmer's competitive positioning has certainly shifted for the better, though, and with several attractive avenues of growth in reach, particularly emerging markets, the firm could finally produce tangible benefits for shareholders.In our view, the neonatal screening business is the crown jewel of PerkinElmer's product portfolio. The firm holds leading positions in neonatal, prenatal, and maternal testing and screens the bulk of babies tested worldwide. The U.S. market is characterized by stable profits and pricing power, yet the main opportunity for the newborn screening business lies overseas in emerging markets. While more than half of Chinese newborns are screened with PerkinElmer kits, the majority undergo testing for only three or four disorders, compared with 30-plus disorders in the U.S. The firm should capitalize on the vast potential of this market, along with India and Latin America. Emerging-market opportunities also abound in the firm's infectious disease product line and environmental segment. With growing emphasis on quality of life, these segments are positioned to benefit from strong secular demand, and emerging-market revenue is expected to be the most important growth contributor going forward.The shift in revenue mix toward diagnostic areas will help lessen PerkinElmer's exposure to low-margin industrial end markets and offer a better growth profile. We think any future value creation is contingent on greater discipline in the firm’s capital-allocation strategy--not its strongest suit in the past. While the company has taken steps to shed weak assets to support more attractive diagnostic acquisitions, including its $1.3 billion Euroimmun purchase, we remain skeptical that there has been enough value creation to justify the level of investment over the years.