Hidden Gems：Chris Waller 评估 Judges Scientific 的投资逻辑

With me today, I’m happy to have on, I think for the third time, my friend, the founder of Hidden Gems Investing, Chris Waller. Chris, how’s it going?

Good. Thank you for having me on again.

Hey, thanks so much for coming on. Before we get started, I’m going to give 2 disclaimers. First, nothing on this podcast is investing advice; full disclaimer at the end. Second, Chris is a friend, but he runs one of my favorite Substacks on the planet. In my mind, it’s the perfect type of Substack: I get 2 emails a month from it, but they’re well thought out, super-deep, high-quality research.

I get everything from the compounder stuff we’re going to talk about today to, every now and then, cash-shell special situations, which I love as well. I love it. It’s one of the few emails where I read pretty much everything he writes. So, if that’s not a good pitch, I don’t know what is, Chris.

But let’s talk about something you wrote. You wrote it up, and I instantly said, “Hey, you’ve got to come on and talk about it.” The company is Judges Scientific. It trades in London. Disclaimer: international stock, maybe a little extra risk, but I’d love to dive into it. What is Judges Scientific, and why are they so interesting?

Yeah. No, thanks for that, and thanks for mentioning Hidden Gems Investing.

Well, I mean, my check’s in the mail, I’m sure.

I should say I own Judges Scientific through my fund as well, so full disclosure there.

Judges is a UK-listed, £400 million market-cap serial acquirer. It buys scientific-instrument businesses. These are usually companies that are very niche; they’re almost always the leader. In some cases, they’re even a monopoly in that specific niche. So, very low competition and very high pricing power.

These are small private businesses with a liquidity event, like a founder exit. Judges has a really strong track record here. Over 20 years, they’ve delivered about a 20% per annum return on incremental capital. The stock has returned a similar amount, about 25% per annum.

These are good businesses. They’re not companies that need turning around. I think return on tangible capital is about 40%, and organic EBIT growth is about 9%. They’re small private businesses, usually £5 million to £10 million deals. They’re nearly all in the UK, but they sell roughly 1/3 in the US, 1/3 in Europe, and 1/3 in the rest of the world.

Judges has been incredibly disciplined in its acquisitions. They have a founder-CEO who owns stock worth about 200 times his base salary. They buy companies on average for about 5 times EBIT, 6 times if you do a weighted average. The most important thing is that they’re very, very disciplined on the price paid.

There have been multiple 2-year periods when they didn’t make a single acquisition. They’ve done 25 in total over 20 years, and I imagine that would have been extremely difficult for a serial acquirer. So, very disciplined on price and very high integrity.

The reason they’re able to get these businesses at such a low price is because they’re very hands-off post-acquisition. They don’t extract synergies. They don’t merge the companies or the brands. They’re not like private equity; they’re not going to load them with debt. Basically, they’re going to leave them untouched.

I spoke to quite a lot of founders who sold their businesses to Judges in this process, and all of them told me that’s the reason they sold to Judges.

Can I pause you? I’ve got lots of questions, and I’m going to let you continue. I just want to emphasize one more thing. When I say Chris does work, I’ve been, maybe not so sneakily, trying to do expert calls with everyone who comes on the podcast.

I’ll do an expert call through Tegus and AlphaSense—I obviously have a relationship with them—and I had them drum up a list of 12 experts and sent it over to you. Your response was, “Oh, I’ve already talked to all of them.”

If you’ve already talked to all the experts in the company, it doesn’t mean the stock is going to work or not, but it spoke to the diligence, and I wanted to mention that when you said you’d spoken to founders, because I know you did. We had about 12, and none of them were new to you.

Yes. Unfortunately, it doesn’t guarantee that you get the investment decision right, even if you do all the work. But I think it gives you a better chance. A lot of these companies I’m looking at are small, so you can definitely learn more about an industry.

Let’s dive into a bunch of different things. Just real quickly, to level-set for people again: Judges is doing lots of small acquisitions, but can you just, one more time, give an example of the type of company that they would acquire?

Usually, a private business with a founder who wants to retire either immediately or soon afterward. These types of scientific instruments are things like vacuum chambers, ultra-low-temperature cooling, and analysis of different soils and rocks.

This type of equipment is generally thousands of pounds. In a couple of cases, it can even go up to £1 million for a whole system. So, very high-tech equipment.

Yeah, and I think it’ll come into play in a second. This is the type of equipment you’re going to find—not all of it, but a lot of it—in university laboratories, right? They’re running hard science. It’s not as simple as just the microscope that they say, but I think it was in one of your posts, or maybe it was in their investor deck: it was a 15-fold microscope with all sorts of different things. So, really fancy stuff.

Let me ask the question I like to start every call with. Okay, great overview. I loved it. But the market is a competitive place. What do you think you’re seeing that the market is missing that makes Judges an alpha opportunity?

One thing I should add as well is that it does trade at 21 times free cash flow, which may seem like a premium valuation on its face, or doesn’t scream cheap automatically. I think that if they can redeploy capital at these 20% returns for long periods of time, that means their earnings are going to grow at 20%.

If they can redeploy 100% of earnings, you can still grow earnings at 20%, and if it holds its multiple, you can still generate that return as an investor. There are a lot of serial acquirers with this type of success that trade at a higher multiple.

In terms of what investors are missing, aside from the fact that it is still small—a £400 million market cap—despite this track record, they’ve also had quite a lot of short-term headwinds. The stock is actually down by almost half since its peak 18 months ago, really the first time they’ve had a drawdown of this scale.

The reason is they had an issue in one of their subsidiaries, the biggest acquisition they made, called Geotek, which had a quite significant decline in earnings. So, we might touch on that.

They also had a period where, because they sell some products into China and there have been some macro headwinds there, that impacted them. Most recently, they've had this issue around U.S. college spending, which has fallen quite significantly. So those 3 headwinds are what's basically causing investor concern. Then there's a longer-term issue: how long can they keep doing this? The founder is 76, so that's probably the longer-term issue.

Look, you hit all the questions that I'm going to ask, but I'll try to earn my bones as a good podcast host and add some meat onto those bones. So, let's start with the acquisition. They call it their buy-and-build model, and they give lots of reasons why they can buy at 5 times EBIT, which we can dive into.

I do still want to push on that a little bit. They say, "Hey, we're going to go buy these businesses at 5 times EBIT. And, by the way, we're going to leverage it up 3 or 4 times EBIT, so we're only putting in 1 or 2 times our cash. We get a 20% return, but it's even better than that because we put the cash flow in."

I had the same pushback on TerraVest when we talked about this. I have the same pushback when we talk about Constellation Software, which is the one everyone's going to think of with these roll-ups, and there are plenty of others. But my pushback is: I get it—if I was selling to Judges Scientific versus a middle-market private equity shop that was going to fire 70% of the employees, maybe I'd take a little discount. But 5 times EBIT, a 20% return that you can also lever up—why are people giving them such a good deal? It seems like such a good deal here. I always question why the seller is going to give someone a good deal.

Yeah, there are a few competitors that Judges Scientific faces, and a few that are coming up. Aside from private equity, you've got companies like Oxford Instruments and Thermo Fisher Scientific operating in this type of scientific-instrument business. They make acquisitions like this all the time, but they're going to consolidate your business. The reason, in their opinion, for doing that is that they think they can extract all these synergies, and that is why they approach it that way.

In terms of truly hands-off companies, there is 1 other publicly traded company called SDI Group, which takes the exact same hands-off approach to making these acquisitions. Sometimes they bid on the same deals as Judges. But I think that's a good example of why it's really difficult to do, because they actually changed their CEO fairly recently. They've got a new CEO who is very much emphasizing synergies and pointing to obvious things like, "Hey, why don't we have 5 companies go to market as 1 or exhibit together?" These things seem really obvious, and there's just a lot of conventional wisdom that that's the way to extract value.

The problem with that is you then put off these founders. There are some founders who are willing to sell for a cheaper price because they really care about the company not changing, so it's difficult to maintain that discipline.

If I could just pick at this point a little bit: everyone's aware of search funds, right? You basically get a Harvard grad who says, "Hey, instead of going to private equity or banking, I'm going to raise $3 million and go buy the local HVAC or plumbing company. I'm going to apply my Harvard MBA skills to it, and maybe we'll go buy the company in the city over eventually."

They basically say, "Hey, I'm going to go shake hands with the local plumber, and he's going to sell to me because I'm going to operate it and standardize it. But I'm not a private equity firm that's going to fire everyone." Because of that, I'll get a deal. Historically, that has worked quite well, I believe.

But I've been worried about that because, even if it works well, there are a lot of Harvard MBAs out there. You hear about all these plumbers saying, "Hey, every month I'm getting 100 emails from search funders." I do wonder about Judges. Like you mentioned, SDI seems to be changing the model, but Judges had this quote on 1 of their calls where they said, "Hey, over the past 20 years, the multiple we pay for businesses that we buy has not changed."

I was thinking, "That's really interesting." It hasn't changed at all with more financing and the ability to copy this model, along with search funders and small private equity firms. I was just really surprised that, even if they've got a little moat versus private equity, it doesn't get competed away by other people rolling out the same kind of Constellation Software, Berkshire Hathaway-style playbook. So, what do you think about that for acquisitions?

I think it will take a long time for someone to replicate their track record and reputation, because they've been doing the same thing for 20 years. Let's say tomorrow you and I took the exact same approach and could really do that. What founder is really going to sell to us over Judges when we haven't made an acquisition, or we've only made 1 or 2, when Judges has a whole list of 25 companies you can speak to?

The founders will very openly tell you that these guys are trustworthy. A number of the founders mentioned to me that, when they were going through these negotiations, they had reference checks—not from people Judges provided, but from people they knew who were able to vouch for Judges and say, "Yes, you really can trust these people. They're not just saying all of this in the acquisition phase and then going to change."

I think it will take quite a while for someone else to build that same reputation. These acquisitions are small—£5 million to £10 million—and so there isn't as competitive a bidding process as there would be at a bigger scale.

You know, the other thing I thought was interesting—you say it's not competitive. I thought it was interesting, and I think it was on the Q4 call as well. They said, "Hey, a lot of our acquisitions, we were actually the runner-up bidder, and we don't retrade. We bring financing to every deal. We can sign on the dotted line. You can trust us."

They said, "Hey, a lot of times we're the backup bidder, but every now and then the winning bidder falls through, and people just come to our backup bid." I thought that was really interesting. If you're winning something and you say, "Hey, we were the runner-up bid. There was a higher bid out there, but for XYZ reason, we got it," that's always really interesting.

I think in about a third of their acquisitions there's actually no competition—something of that order of magnitude.

Let me ask another question: sustainability of the model. They do 1.3 acquisitions per year, is their history. Let's just round it down to 1 to make the numbers easier, right?

Yeah. When you're doing 1 acquisition a year and you're a $100 million company, and you're buying a $5 million company that, maybe after you standardize some procedures and put a 10x multiple on it, was worth $20 million, that's a lot of value creation, particularly if you use some debt. That's a lot of equity value creation.

But this is a $400 million or $500 million company now. So they either need to do bigger acquisitions—instead of doing a $4 million acquisition, they need to do a $16 million or $20 million acquisition to make that same accretion to the overall company work—or they need to accelerate the acquisitions.

When I look at this, my first worry is, hey, Chris is right. He found something that historically has delivered great returns. The acquisitions were great, but these are really small acquisitions, and there just aren't enough of them to move the needle anymore. So, do you think they can continue to find enough deals to move the needle and create this value creation that, as you said, at 21 times free cash flow, you are baking in acquisition-related gains?

Yeah, I think that's definitely the challenge, and I think they've done a few things that are going to help them make more deals. Ideally, we want them to make more of these small deals, not move up. They've done a little bit of moving up—1 or 2 bigger deals—but you get the lowest prices with the smaller companies.

They've significantly expanded the management team. If you go back 2 or 3 years ago, there were only really 3 of them: the founder and CEO, the CFO, and the COO. That was basically it at the head office. They've now got 3 other people who have come in over the last 3 years, so their core team has pretty much doubled. That's going to give them a lot more management bandwidth to be able to do a larger number of deals.

They're still very early on right now, but they're starting to create some platforms. Some of their acquired businesses have started making acquisitions of their own. That's very early on at this stage, so it's too early to really say it is a platform, but that's something else that they're working on.

The other thing is that they've been quite focused on the U.K. They have made 1 or 2 acquisitions outside the U.K., but they haven't gotten the prices they'd want, which is why they haven't made more than 1 or 2.

But that’s something that at some point they could do more of. Even the industries that they look at—scientific instruments is a great sector to be in, but there are a lot of adjacent industries. Depending on how you want to categorize the industries they look at, there are actually thousands of companies. So I think they’re working on all of these areas, but yes, that’s going to be the challenge.

You mentioned that you’d love to do as many of the smaller deals as you can. You get the lowest price, and they tend to be the most strategic. Even if you’re not rolling them up in terms of firing people and synergies, you can probably toss them on your CRM, your accounting, and all that sort of stuff.

I think they’ve got a slide in their deck that says, “Here are some of the standardized things we do.” If accounting software costs $50,000 per year and you buy a $4 million business, that’s a nice synergy. You buy a $40 million business and put it on yours, so you save $50,000—it’s meaningless. So you can see that.

But I want to talk about Geotek real quick. Not specifically Geotek, but it was by far their largest acquisition. I think they spent, including the earnout—which probably doesn’t get hit at this point—over £100 million on the acquisition. I think it was 3 times larger than their previous largest deal, and probably—

£80 million, I think. Yeah, but it’s by far the biggest.

And probably 8 to 10 times larger, maybe even more, than their average deal. Geotek has been an issue. We can talk about the issues at Geotek, but I just want to ask, at a high level: when I look at this and see that this serial compounder, this serial acquirer, took the biggest swing by far that they’d ever taken, and it was the worst acquisition they’d ever done, I look at it and say, “Oh, you might have trouble scaling that model, guys.” What do you think about the overall Geotek learnings?

Yeah. I would also wrap in that there have been a couple of acquisitions that haven’t been successful. That’s Scientifica and Armfield. Those are about £8 million acquisitions each, so historically on the larger end, although not like Geotek. Sometimes investors are looking at this and saying, “Well, hey, when you scaled up your acquisitions, they weren’t so good. So maybe this doesn’t work as you scale.”

I’d say probably a few things. There have been some acquisitions of this scale that have worked very well. GDS Instruments was one. They relatively recently bought a company called TIER Coatings, which looks like it’s a very good fit. I think I was looking through the data, and 7 of their previous acquisitions have now grown to a scale where they’re at a similar level or bigger than Scientifica and Armfield. There’s nothing unique about the £8 million number that means they can’t go above that; that’s still a very, very small company.

With Geotek specifically, I think they had an issue. Maybe just to give you a bit of background on Geotek, it’s about 20% of Judges Scientific’s free cash flow right now, so it’s meaningful. They analyze soils and rocks, so for oil and gas drilling and mining, where they need to know where to drill, this type of analysis is very important.

Geotek is really the only provider in something called multi-sensor, non-destructive analysis. That means they can take a sample and analyze it in lots of different ways without destroying the sample. You can use it again. It’s a company that fits in very well with the style of business that Judges likes to acquire.

The thing that went wrong last year—this company was acquired just over 2 years ago—was that about 1/3 of Geotek’s business is providing equipment for an expedition. This is literally a vessel that’s going to go out at sea and help map the ocean floor to figure out where to drill and so on. Typically, they do 1 expedition per year. There was no expedition last year, and that loss of revenue dropped through entirely to profitability. As a result, Judges as a company actually saw negative revenue growth and a decline in profitability last year.

That’s actually reversed. In the first half of this year, there was an expedition as normal. I don’t see any reason to believe that this acquisition won’t work long term. I think it’s still very early; we only really have 2 years of data. It looks like the headwinds they had have reversed. I know a lot of investors look at this and have just concluded that it’s a failed acquisition, but I think it’s far too early to say that.

I think the company probably agrees with you. On the 1 expedition, I was kind of surprised when I was reading it. They said, “This much of the revenue and earnings streams comes from 1 expedition per year, and this year we didn’t have one,” and it’s like the year after they did the acquisition, right?

The expedition sounds like it’s for oil and gas, mapping the ocean floor, but could you give a little bit more detail, to the extent you know, about what is going on with this expedition? When you say there’s only 1 per year, I’m like, “Oh, is Exxon the only one who uses it, and Chevron and everyone else is using someone else?” What’s going on with this expedition? Can you give more color on that?

Yeah. I believe it’s a Japanese vessel that they provide all this equipment to, and historically it’s been 1 expedition per year. This one actually got delayed, so it happened early in 2025 instead of in 2024. It wasn’t canceled. Historically, they’ve done 1 per year, and there are, I believe, only 4 vessels like this in the world that can actually do these types of expeditions. I think they’re quite geographically spread out.

That’s 1/3 of their business. It’s not the other 2/3, where they’re almost a monopoly, but it’s still an area where there’s obviously very limited competition. It’s very specialized. I don’t see any reason to extrapolate that there’s something wrong with this business.

I would also say that although Geotek is 20% of Judges Scientific’s free cash flow today and by far the biggest acquisition, if you look at the rates at which they will probably compound by making more acquisitions going forward and growing EBIT at mid- to high-single digits, it’s probably only 15% of free cash flow in 3 years and 10% in 6 years, and so on. I do think that people tend to overly focus on this currently.

If I can back up just a little bit, I think the number 1 question is: can these guys continue to find accretive acquisitions? Because if they can continue to find accretive acquisitions where they’re paying 4 or 5 and getting that 20% return on capital—and especially if they can scale that up—the sky is kind of the limit here. I think that’s the number 1 question.

I’m not sure you remember it, but if you don’t, I’ll refresh your memory. Your write-up had the Halma example as an answer to that question, and I just thought it was such a nice example. I wanted to pause here and let you present that as a rebuttal to that question.

Yeah. Halma is a serial acquirer in the UK that operates in scientific instruments as well as a couple of other industries. They, of course, had the exact same issue: they were buying these types of businesses 15 or 20 years ago, and they got to a level of scale where these small acquisitions were less meaningful.

What I did was look at their cash-on-cash returns over 5-year periods. I looked at, “Okay, let’s sum up the total cash spent on acquisitions, CapEx, and working capital, and then let’s compare that to what the growth in operating cash flow was,” and use that as a proxy for how much they’d invested over 5 years and what the resulting return on that investment was.

If you do that analysis, you’ll see that when Halma had revenues under £500 million, they had very similar returns to Judges—20% plus. Over time, that reduced as the size of Halma increased, and today it’s more like just over 10%. The point of that was to say that the moment when Halma really saw diminishing returns on acquisitions was when they reached £500 million in revenue. Judges today is at £130 million in revenue, so it’s a long way below that.

I would also say that if we think of other serial acquirers, I think the first time I was on this podcast I was talking about TerraVest. TerraVest today will generate about C$1.4 billion in revenue, and they’re still finding great deals. They’re doing $20 million deals that they’re now not even disclosing the financials for because they’re small relative to TerraVest. We’re talking about whether Judges can do £5 million or £10 million deals. I think these are still very small companies with a lot of runway.

So I think you’re 100% correct, though. TerraVest has more commoditized businesses. I just don’t know about the kind of businesses—I hate to use ESG because it’s not fully ESG, but businesses with a little bit of an ESG overhang—whereas this is lab tools.

I do understand there are lab-tool businesses that have billions of dollars in market value, but I do wonder if, as you step up from 10 million to—let's just use 100 million—you're not buying from mom-and-pops anymore. There are real mid-tier life-science tools companies; Thermo Fisher wants to snap up every single 100 million EBIT business. I used 100 million in EBIT, not a 100 million valuation, but still, I do wonder if this has a little bit more of a cap versus TerraVest, where it's like, hey, nobody cares about a 100 million oil-and-gas tank—gas tank, whatever it is. I just wonder if that's the case.

Yes, I think you're right. There will come a point when we get those diminishing returns; I just think it's still quite far off. For context, Judges' free cash flow this year will be something like £20 million. That will grow over the next 3 years. They can take on some debt, but their acquisition spend over the next 3 years is probably going to be something like £80 million unless they find some really attractive deals. Depending on how many deals you think they can do, those are still fairly small deals. So I don't think we're at the point, even over the next 3 years, where we're really hitting those diminishing returns.

Perfect. Let's talk management. You already addressed it a little bit, but this is a CEO in his 70s—he's 76. This is not Constellation Software 10 years ago, with a CEO in his early 50s, where you say, “Hey, I've got 20 more years of growth, even if I'm unlucky.” This is not Berkshire in the '80s, where you say, “I've got 40 years of runway.” At 76, he's either going to retire or pass away in the next decade; 15 years is kind of the upper limit. Even at 76, you start worrying about slowing down.

How do you think about the succession issue here? You did mention they upgraded the team, but you still lose that founder—the driving force behind 50 deals here. Do you worry about that?

Yes, I consider this the biggest risk. He's 76. In terms of his actual role today, he has been reducing his role for the best part of a decade, to be honest. He's very focused on the acquisition side. He doesn't really get involved post-acquisition; there's a COO who really manages that.

His focus is on acquisitions. First of all, he hasn't said he's going to retire, and I don't think he's the type of person who is likely to retire anytime soon. I think what is much more likely is that he moves up to chairman. There's a chairman who's quite old as well, and I would expect that at some point, maybe the chairman retires and David Cicurel, the CEO, moves up to chairman.

I think that's okay because the most important thing that he brings is just the discipline on acquisition multiples and not overpaying. In terms of technical expertise, they have that already with the team they've brought in. In terms of sourcing, I think that can also be replicated, and they're adding people on that as well. So I think those are all replicable.

I don't think the day he goes that Judges are suddenly going to be very hands-on with companies. One of the things I asked in my due diligence as well is how much of this reputation of being hands-off and being an attractive acquirer is with David Cicurel versus with Judges as a company. The response was generally that it's more with the company.

I do think that the thing they will miss is just that discipline. As long as he's involved with the company as a chairman, I think that's fine. He can still say no to deals. I don't think he'll be exiting completely over the next 3 years; I certainly don't think he will over the next 5 years. He's still got the majority of his net worth invested in the stock.

Speaking of the majority of his net worth being invested in the stock, in the write-up you noted that his stock ownership is 100 times what he gets paid. He had a nice quote on the Q4 earnings call: “I'm obsessed with shareholder value. It's all we want to do: create shareholder value.”

If 4 years from now he's 80 and says, “All right, it's time for me to retire,” would it make more sense for him to sell this to a private equity firm? Or would you just kind of lose something? I could imagine both ways: you sell to a private equity firm, and they like the platform and want to keep it as is; or you sell to a private equity firm and they say, “Hey, we own these things. Let's roll them all together and get that 1-time synergy hit.”

Or maybe there's no chance they sell to a private equity firm because once you do that, you lose the culture and risk that. I can see every which way. What do you think would make the most sense?

I think it's unlikely he would sell the company. If they sold to private equity, even if the private equity firm was hands-off, I think that image and reputation they have of not being private equity would obviously be difficult to maintain.

I also think he's a little bit like some of the founders he buys from. I think this company is his baby, and he doesn't really want to see it changed in a material way. So I think what is much more likely is that he is building the team, and I think his successor is already with the company. I think it's a guy called Tim Prestige. I think it's much more likely he keeps it like that.

Perfect. Let's talk about Q2. Toward the end of July, they came out with a Q2, or H1, update. This is a British company, so in the H1 update they're actually going to report full earnings in September, I think. You don't get the deck, you don't get the call, and you don't really get a lot of commentary. But they pulled down their guidance, right? They said, “Hey, the big issue we're having is US government and higher education.”

I just want to talk about it because people are going to look at the chart and say, “Why was this down 3 weeks ago?” Let's talk about the government guidance—what's going on, and if that continues. Obviously, nobody likes to get hit in the face, but is this a 1-time issue? Is it going to get made up? How do you think about that?

About 3 weeks ago, as you say, they had their trading update and cut their guidance for EPS by between 10% and 20%—or 22%, I think. They gave a range; roughly speaking, it's about £3 per share. The stock is at £60 right now.

The US is about a third of the company's sales. Within that, we don't know the exact amount that ultimately ends up with US colleges, but it's probably something like half of that. Essentially, college spending on new equipment has come to a complete halt since March.

I was a bit surprised by the extent of the reduction because in March, when they had an earlier trading update, they had their full-year guidance. This management team is historically quite conservative and very high-integrity, so they were surprised, and I was surprised. I think what happened is that in March, President Trump made various announcements about cutting scientific funding in the US.

Depending on the institute you look at, it's somewhere between a 20% and 50% cut. The National Institutes of Health, for example, which is one of the biggest, faces a 40% cut. That really happened in March, April, and May.

On top of that, there's a second issue: there's a confrontation going on between the US government and certain colleges. That's not just specific to scientific instruments; it's really around other topics. Pulling government funding across the board is one of the tools that the administration is using, and that has impacted them quite heavily.

These are the largest research institutions, right? It's probably the biggest buyers of these tools who are having their funding and everything frozen. The question is, you've already seen a few colleges settle with the administration, but the NIH funding cuts are happening. You've seen the universities settle, but is this a 1-time cut and then it bounces back next year? Or is this, for at least the next 3½ years, until we maybe get a new administration, a much lower baseline going forward?

Are all the universities scared of their own shadow for another 3½ years? They're kind of looking over every line item and, as you said, a lot of these instruments are thousands or tens of thousands of dollars. They're looking over every line item and saying, “Hey, maybe we don't need the microscope.” How do you think about that?

Yes, I think it's a very good question. I think what is hurting them right now is not just the actual cuts, because a lot of the cuts are proposed cuts, as well as some grants that have already been made that have been frozen. There's a good website called Grant Witness where you can track this stuff.

What's hurting them as well is just the uncertainty. You could imagine if you're a college in the US, regardless of whether you're actually Harvard or Columbia, if you're just a college and you're seeing all this happen, you don't know whether your grant funding will actually come through.

Will the administration come for you next? And so there's a lot of uncertainty, and that uncertainty is actually the bigger killer than the actual reduction. What's basically happened right now is there's been an almost complete halt of college spending on new equipment.

So, to the question of whether this is front-loaded—whether this is kind of 3 years—it's basically gone close to zero since March. This should be front-loaded. It can't go lower than zero. Ultimately, we are seeing some resolutions. I think Columbia settled and they've had their grant funding restored. Brown, the same.

Any type of resolution, regardless of the size, will reduce uncertainty, and I think you'll see some level of improvement from here. Now, I would assume that there is going to be some significant reduction in scientific spending regardless of the resolution. House and Senate committees are trying to fight that, but let's assume for now they end up at a 20% or 30% cut. Right now, spending is reflecting a 100% cut because they're just stopping all spending.

So I think you're obviously going to see that be a headwind in the second half of this year. That's in the guidance. You might see a little bit in the first half of next year, just because in Q1 you won't be lapping this uncertainty yet. But basically, from then onward, you should see some recovery. If spending goes from negative 100% to negative 50% or negative 30%, that's actually quite a significant recovery. So instead of seeing the company grow at, let's say, 7% to 9%, as they have historically, you might see them grow at double-digit rates from a lower level.

The other interesting thing is the clean-ish balance sheet here. These guys—yes, it sucks in the short term, but you have to wonder: Is there a 5 million-revenue business out there that's run by a mom-and-pop where all their orders just got canceled, and they're calling up and saying, “Hey, we've got an inventory bill coming due. We had ordered for this”?

So you have to wonder, on the other side, is this a moment for these guys to go buy and make some really accretive deals in a sector that's probably not super loved right now?

Yeah.

Let me talk valuation real quick. You mentioned up front 21 times; I'm just going to call it a mid-20s free-cash-flow multiple here. Right now, this is a business that historically, as you said, has grown mid- to high-single digits, plus accretive acquisitions. So the 20s is probably a fair-ish multiple for a normal business.

Then you get an above-normal business: there's extremely limited capex, you get great tax, all this sort of stuff that adds leverage to the thing. A business like that could easily sustain a 40- to 45-times multiple, I would say, if you believe everything that Chris has presented. But I just want to push back a little bit: a mid-20s multiple and saying, “Hey, 3 years out I'm going to slap a mid-20s multiple on this, assume the continued growth, assume the continued accretive acquisitions,” to get an IRR that's in the 20s—those are aggressive assumptions.

So where do you get the confidence? Because I would push back and say, “Hey, if acquisitions are a little slower and growth comes down, and all of a sudden you're looking at a 15-times free-cash-flow multiple, you get the reverse Davis double play: the multiple comes down, growth comes down—boom, everything's... You get a pretty negative IRR pretty quickly.”

Yeah, it's something I've thought about. If you were just to look at the organic growth of the business—take away the acquisitions for a second—5% to 7% or 7% to 9% organic growth, trading at 20 to 25 times, seems fairly priced.

But I think this is a serial acquirer, and so I would obviously very much look at the total amount of growth they can achieve. If they can invest 100% of earnings at 20% returns, that's 20% earnings growth. How long a runway do they have to keep doing that? What should a business that can grow at 20%, or even just in the teens, for a long period of time trade at? I think when you look at it that way, 21 times valuation is very fair.

In my valuation, I don't assume that the multiple goes up, or any significant multiple expansion. You can take your own view on that. If you think the multiple stays the same, then you earn whatever the earnings growth is; if you think it comes down, then you have to take some of that off. I just think that if you look at other comps, there are a lot of serial acquirers like this that trade well into the mid-20s, sometimes even 30 times free cash flow.

So, regardless of my argument—organic or inorganic—the reality is I think the market does pay these types of multiples or higher. They've got a lot of short-term headwinds that they're going through right now, and at some point I think they can get back to normal. I think the market has shown it's willing to pay these types of multiples for a business like this.

The only piece of it is that a lot of the loose comps that trade for mid-20s to low-30s multiples, I think their organic growth in the businesses that they buy is actually lower than what Judges has. So, if it works, it should trade for—now, maybe there's a little bit less acquisitive growth—but if it works, it should probably trade for a higher multiple than those businesses would, I would say.

These businesses are higher-quality businesses. There's no doubt. They're significantly higher quality, depending on which serial acquirer you look at, but certainly compared to the more industrial ones, these are much higher-quality businesses.

One last question, and then I'll turn it over to you for final thoughts or anything I missed. I can't claim credit for this; it came from someone on Twitter. They tweeted out: “Hey, in January, the management team got an option grant that was based on achieving 5% per-share EPS growth over, I believe, the next 3 years. Their prior option grant, if you looked at the bottom of that press release, was 10% CAGR over the next 3 years.”

Now, the company, to its credit, said, “There was a UK tax increase from 19% to 25%, so we don't think we should give 10% again.” But people are saying, “Hey, this is supposed to be a compounder business.” We've talked about all the reasons: 5% revenue growth, great leverage. Is giving them EPS targets at 5% for 3 years out of line with everything we've been saying, or is it too generous?

Well, it's a very astute observation, and it's one that I noticed as well going through the compensation package. Frankly speaking, I think it should be higher than 5%, so I would very much support a higher number than 5%. If you look back through their history, yes, it was at 10% previously, but before that it was at 5% as well. So I suspect in their minds, they're just going back to what it always was. But, frankly, I agree: it should be at a higher number.

I would also say that I suspect part of the reason they want to be generous in giving management options is because, obviously, the founder has a lot of shares. The COO owns shares worth about 20 times his base salary, which has accrued through these option packages over the years. They've got these newer members of management, and I think they want to get them in a position where the primary determinant of their compensation is the share-price performance.

So, in some ways, if there was no EPS target and they were just getting options, maybe we wouldn't have a complaint, but I think that's partly behind why they're being generous in that package.

Actually, last thing—I know I said last thing, but one more. I do think it's worth quickly discussing that the company pays out a dividend. I think you and I are U.S.-based, despite Chris's accent. He's U.K.-based. Most of my listeners, I'm sure, are U.S.-based, and when you think about serial compounders—serial acquisitive compounders—until they're in the very, very late stages of their cycle, you tend not to see them pay a dividend.

I mention the domestic because I think in London the culture is a little bit different on dividend payments. They've clearly thought about it, they've gotten questions, and they addressed it on the Q&A call. I just want to talk to you quickly about the dividend policy here: Do you think it makes sense? Are you willing to just give it a pass? How do you think about all that?

Yeah, the punchline is that I think they should not be paying a dividend. If you can generate 20% returns on capital with investments, paying out at your cost of capital minus income tax is not the best use of cash. Ultimately, I would prefer that they just reinvested everything.

I think some of the points you made—there is, unfortunately or fortunately, a very different culture in the UK around this. A lot of income funds and a lot of investors, their shareholders, see that as important. I think for the founder as well, he has quite a low base salary, and so his dividend payment is actually where most of his income comes from. I think for some of the other members of management, it's pretty meaningful as well.

And so I think that’s the idea behind it. But yes, I would prefer they just invested in acquisitions.

Do you know what the biggest red flag I saw in Judges was the whole time I was researching it?

What?

At the end of the Q4 call, when they were asked about the dividend, he said, “I’ve been to Berkshire several times. I’ve read Warren Buffett and Charlie Munger, and I know they don’t pay dividends.” And in my history with serial compounders, when they reference the GOATs, it’s not ending well.

That’s definitely something I’ve seen in a number of companies. Whenever your selling point is something someone else has done, that’s usually not a great selling point. But in this case, they obviously have the 20-year record.

My favorite was—I can’t remember if it was a public deal or one that I got shown privately that got pulled. I can’t remember, but it was a deal to buy a crypto company, right? It was going to basically turn it into a digital-asset treasury company, and the headline quote was a Charlie Munger quote.

I was like, Charlie Munger was the most anti-crypto person in the entire world. He would be rolling over in his grave if he knew that you were using this to launch a digital-asset treasury company.

So, look, Chris, credit mainly to you, because most of my research was reading your report, reading your follow-ups, and all that sort of stuff. I think we’ve done a really nice job explaining Judges Scientific, talking through all the bull cases, bear cases, everything.

But I just want to pause here. Is there anything else that you think we should have hit, or that listeners should be thinking about, that we maybe glossed over?

Probably the only thing—we touched on it a bit, but it’s worth fleshing out what actually happens to these companies after the acquisition. Judges is very, very hands-off, to the point where they don’t integrate IT systems. They’re really very hands-off. In fact, some of the founders told me that they really haven’t noticed a difference in terms of their actual business, pre- and post-acquisition.

But there are a few things that they do. One is reporting. A lot of these are very small businesses, and they don’t have great reporting or KPIs and so on. Judges does demand that every month, and that tends to have an impact on the business once they’re more focused on these financial metrics.

The second thing is succession. A lot of these founders are either retiring immediately or usually after a couple of years. Judges is very, very good at managing that transition, which is actually quite important because, if you think of small businesses, quite often when a small business loses its founder, that’s a lot of the value leaving.

The fact that these businesses have continued to grow at 9% organically looks like nothing’s changed. But actually, if you look at the counterfactual—if they had not been acquired—they probably wouldn’t grow anywhere near that.

The last one is guidance. They don’t push anything onto these businesses, but they do try to hold them effectively to account in a couple of areas. One would be pricing. A lot of these companies have very strong pricing power and haven’t used it.

The other thing is R&D, making sure that’s focused on projects with a commercial outcome, not a science project. Those are probably the 2 things I would highlight that they encourage as well.

Most of my time this year has been spent on net-cash biotech after they bust out on Phase 3 and they discount. I’ll tell you, I would love to have control of these and make sure that all the R&D spend at these companies was going toward commercial prospects and not toward, “Hey, we’ve got cash and we’ve got a thing. We’ve got to do R&D.”

If it’s a way to shorten the average person’s common cold, to take it from 7 days to 6 days, 23 hours, and 58 minutes, that’s maybe not something we should be investing money in because there’s not a lot of commercial potential there. A $100 million Phase 3 doesn’t really make sense for that.

Yeah.

That’s just my rant, and I don’t even know what—

It is. Ultimately, it’s a business, and yes, Judges is good because they have great technical expertise, but they are very business-focused and very returns-focused. They’re able to get the best of those.

It’s the wonderful thing about having, hopefully, a shareholder-focused control shareholder who’s overseeing these businesses.

Cool. Well, okay, if that’s it, Chris, I mean, again, I love having you on the podcast. The great thing about Hidden Gems is that it’s only a couple of emails a month, and they’re all very well-focused and deeply thought out, so I love reading it. I’m sorry you can’t make dinner next week, but have fun, and I’m looking forward to catching up soon.

Great. Thank you for having me, and thanks to everyone for listening.