The major US stock markets managed to sustain positive gains in 2007 for the fifth consecutive year, despite extreme market volatility caused by the credit crisis and housing downturn. Strong corporate earnings and the Federal Reserve’s cuts in interest rates were enough to overcome selling pressure in the major US markets, which finished the year with returns in the low to high single digits. Surprisingly, three of the four IBO Stock Indexes showed significant gains, up over 19%, while the Process/Metrology/Motion Instrument Index lost value after leading growth among the IBO Stock Indexes in 2006 (see IBO 12/31/06).

Following robust returns in 2006, three of the four IBO Stock Indexes posted substantial gains this year. The Lab Consumables/Equipment Index jumped 32.4% to lead all IBO Stock Indexes, while the Laboratory Instrumentation and Diversified Instrumentation Stock Indexes followed closely behind with gains of 21.6% and 19.5%, respectively. The Process/Metrology/Motion Instruments Index, which was the strongest performer in 2006, declined 7.4%.

The most significant change to the IBO Stock Indexes in 2007 was the addition of the Diversified Instrumentation Stock Index, which consists of six companies. Other changes to the IBO Stock Indexes were due primarily to restructuring changes, as Ciphergen Biosystems, Stratagene, New Brunswick Scientific and Molecular Devices were each removed after being acquired. New additions to the IBO Stock Indexes were Symyx Technologies, as well as Starlims and ICx Technologies following their IPOs (see IBO 5/31/07, 11/15/07). Exiqon A/S was also added to the IBO stock table following its IPO (see IBO 6/30/07) and was the only addition to the list of international companies this year.

US Stock Indexes

As we leap into the new year and reflect on the past year, it is helpful to understand the current economic landscape. It is clear that subprime mortgages and other risky debt have tightened the credit markets, which has curbed corporate and consumer spending. Furthermore, the defaults on mortgages have led to billions of dollars in losses for some of the top financial firms. In fact, as the arguments continue as to whether the US will face a recession, it could be that, as of the fourth quarter, the US is already in one. As the value of dollar continues to decline and crude oil prices hover around new highs of $100 a barrel, the US will face inflationary pressure, making it difficult for the Fed to lower interest rates again. Only one thing can be certain: the markets with continue to be extremely volatile.

Gainers & Decliners

This year’s list of the top five gainers and decliners among the four IBO Stock Indexes is comprised of the 44 companies in the Indexes. Compared to 2006’s lists, two companies managed to remain among the top five gainers in 2007, while the companies on 2006’s list of the top five decliners have all been replaced. As expected, the top five gainers are in the Laboratory Instrumentation or Consumables/Equipment Indexes, which were the two top performing Indexes. In addition, four of the top five gainers are small cap companies (companies that have a market capitalization between $250 million and $2 billion). Notably, three of the five top decliners are in the Process/Metrology/Motion Instrumentation Index and, similar to 2006, have micro market caps of less than $300 million. The exception is Veeco Instruments, which has a market cap of over $500 million. Two IPOs this year, ICx Technologies and Starlims, would have made the list of top five decliners, as they fell 40% and 21% year to date, but were only added to the Laboratory Instrumentation and Process/Metrology/Motion Instrumentation Indexes in October and April, respectively.

Cepheid posted the largest annual stock price gain in 2007 among the companies in the IBO Stock Indexes, climbing 210% due to strong diagnostics revenues. The company also announced that it expects to reach profitability on an adjusted basis by year-end 2008. Kewaunee Scientific, despite its micro market capitalization, gained significant attention this year due to good earnings growth and a low price-to-earnings ratio compared to its peers, helping shares jump 127% for the year. Sequenom and Bruker BioSciences, the third and fourth top performers among the top five, gained 104% and 77%, respectively, and both made the top five gainers list for the second consecutive year due to strong revenue growth. Sequenom reported strong sales of consumables, particularly bioarray chips used with the iPLEX assays and MassARRAY systems. Bruker BioSciences reported increased demand for the company’s products and was successful in lowering costs following the acquisition of Bruker Optics (see IBO 4/30/06). Rounding out the top five gainers was Invitrogen, another life science company, which beat earnings estimates by more than 20% for each of four consecutive quarters

Symyx Technologies fell 64% to lead all decliners in the IBO Stock Indexes for 2007, after the company reported a significant decline in first quarter earnings. The company’s stock never recovered and finished the year trading at an all-time low. Zygo met with a similar fate after announcing lower than expected full-year earnings, but managed to rebound from this summer’s low to close down 24% for the year. RAE Systems staggered early in the year following a weak 2006 year-end earnings report, which included an unusually large inventory build up. Despite successful efforts to improve profitability by lowering operational expenses, the stock finished the year down 16%. The final two companies on the top five list of decliners, Veeco Instruments and Harvard Bioscience, both fell 11% in 2007 due to either lackluster or declining revenue growth.

Largest Companies’ Performances

Historically, smaller companies have outshined their larger counterparts; while this year was no different, the average returns for the large cap companies in the IBO Indexes were quite impressive. To get a better understanding of how well instrument stocks performed in general in 2007, IBO examined the performances of the top five Laboratory Instrumentation Stock Index companies in terms of market value. Listed in order of size, these companies are Danaher, Thermo Fisher Scientific, Agilent, Waters and Sigma-Aldrich. The five companies gained an average of 31% in share price in 2007.

Among this list of largest companies, Waters and Sigma-Aldrich sustained the biggest gains, climbing 61% and 41%, respectively. The market caps for these two companies are $8.0 billion and $7.2 billion, respectively, which while impressive, is but a fraction compared to the largest companies in the IBO Indexes. Thermo Fisher Scientific and Danaher, the two largest companies in the IBO Indexes with market caps of $28.8 billion and $25.8 billion, climbed 27% and 21% in 2007, respectively. Agilent, the third largest company with a market cap of $15.0 billion, climbed 5%. Revenue for Agilent’s Bio-analytical Measurement segment grew 20% for the year, but overall revenues were impacted by a slowdown in the company’s Electronic Measurement segment.

Three-Year Average Growth

Looking at the performance over the past three years of the 19 companies that make up IBO’s Laboratory Instrumentation Stock Index, three of the top five gainers in 2007, Sequenom, Bruker BioSciences and Cepheid, were also among the top five gainers over a three-year period. Sequenom, Bruker BioSciences and Cepheid gained at an average annual rate of 88%, 49% and 38%, respectively, since December 2004.

Sequenom was the best performing stock among companies in the Laboratory Instrumentation Stock Index over the last three years. The company continued to report strong revenue growth along with the development of new products, including several new genomics products within the fine mapping market, as well as new applications for noninvasive prenatal diagnostics. Illumina, which was the top performer for 2004–2006, was the second best performer for 2005–2007, with an average annual growth in stock price of 84%. The company’s ability to innovate and effectively compete has sustained its high revenue growth rate. Luminex, another small cap company, was the fifth best performer over three years, improving an average of 22% a year.

Only three Laboratory Instrumentation Stock Index companies showed negative returns based on a three-year average. Transgenomic, Affymetrix and Caliper Life Sciences recorded annual negative returns from 2005 to 2007 of 22%, 14% and 10%, respectively. Rounding out the top five decliners, Beckman Coulter improved 3%, while Harvard Biosciences traded flat for its three-year average.

International

International stock markets were mixed in 2007. In Asia, Singapore’s Straits Times Index jumped 11%, while Japan’s Nikkei 225 Index fell 11%. In Europe, Germany’s DAX grew 22%, France’s CAC Index 40 rose 1.3%, Britain’s FTSE100 rose 3.8% and Sweden’s OMX Stockholm Exchange lost 5.8%. Outside the EU, Switzerland’s SMI Index declined 3.4%.

However, the performance of the Asian and European companies in IBO’s stock table was not mixed. The international stocks in IBO’s stock table took a big hit this year, as 18 of the 19 international companies lost value. Fourteen companies reported double-digit losses in stock price.

For the year, Hitachi High-Technologies and JEOL led all decliners among Pacific Rim companies, falling 31% and 33%, respectively. However, Shimadzu and Horiba ended the year with only modest declines, down 5% and 7%, respectively. Techcomp, which is listed on the Singapore stock exchange, was the only company to gain value for the year, climbing 75% after a poor performance in 2006.

In 2007, all 15 European companies in the IBO stock table traded lower. France’s Alpha MOS and Germany’s Analytik Jena AG sustained only modest price declines, dropping only 3%. Britain’s Robotic Technology Systems suffered the greatest loss, falling 46% due to low order intake at the beginning of the year, as well as increased costs following contract disputes for RTS Flexible Systems. After declining 69% in 2006, Britain’s Millbrook Scientific Instruments made the list of the top five largest decliners among international stocks for the second straight year, falling 39%. Despite the company’s production improvements and revenue increases, the stock continued to face downward pressure due to a cash shortage and the highly volatile nature of thinly traded stocks. However, the company rebounded nearly 80% by year end from its July low.

This year’s list of the top five international stocks by average three-year gains was similar to last year’s list. Horiba moved up from fourth place last year to take top honors with an average return of 41% from 2005 to 2007. As with last year, Alpha MOS and Tecan were once again the second and third best international performers over a three-year period, climbing 26% and 25%, respectively. Spectris and Hitachi High-Technologies’ stock prices rose 21% and 19%, respectively, from 2005 to 2007 to place them fourth and fifth on the list.

For the second straight year, the international company in IBO’s stock table that lost the most value on average over three years was Robotic Technology Systems, which reported a negative average return of 36% for 2005–2007. The only other company to report an average double-digit loss over three years was JEOL, which declined 11% a year. Whatman, Biotage AB and Oxford Instruments posted single-digit losses of 6%, 4% and 3%, respectively, from 2005 to 2007. Whatman was also among the top five decliners last year, posting the fourth largest three-year loss for 2004–2006.

December

In December, the US stock markets experienced much of the same volatility that they have experienced throughout the second half of the year. During the early part of the month, stocks moved significantly higher following a report that the Bush administration had secured a plan to help subprime mortgage holders, as well as the hope that the Federal Reserve again would lower interest rates by 50 basis points. However, on December 11, the Federal Reserve lowered the benchmark Fed funds rate target by 25 basis points to 4.25%, leaving investors disappointed, which triggered a sharp sell-off. On December 27, news that the former Pakistani Prime Minister Benazir Bhutto was killed continued to put downward pressure on the markets, erasing all gains sustained earlier in the month. The Dow Jones Industrial Average declined 0.8% during the final month of 2007 to finish the year up 6.4% at 13,264.82. The S&P 500 slipped 0.9% in December to close at 1,468.36, up 3.5% for 2007. Finally, the NASDAQ edged 0.3% lower during the month to finish the year up 9.8% at 2,652.28.

Two of the IBO Stock Indexes reported gains in December, while the Lab Consumables/Equipment and Diversified Instrumentation Stock Indexes reported modest losses of 0.4% and 0.3%. The Process/Metrology/Motion Instrumentation Index climbed 2.1%, while the Laboratory Instrumentation Index edged 0.3% higher.

Laboratory Instrumentation Stock Index

In December, the Laboratory Instrumentation Stock Index gained 0.3% to finish the year up 21.6% at 656.46. Seventeen companies improved, while six companies declined. Bruker BioSciences led all gainers, climbing 43%, while Starlims fell 13%.

For the year, there were 15 gainers and eight decliners among the Index companies. In addition to the list of the top five gainers, there were 11 other companies with double-digit gains. Of the companies not on the list, Starlims had the greatest year-end loss, falling 11%.

On December 3, Bruker BioSciences announced the acquisition of Bruker BioSpin (see IBO 12/15/07), which was warmly greeted by the market as company shares soared 18.5%. On December 10, Banc of America Securities upgraded Beckman Coulter to “Buy” from “Neutral,” leading shares 5.0% higher. On December 14, Affymetrix shares received a boost following a favorable report by UBS, citing a positive outlook for the company’s organic business and development of new products. UBS upgraded the stock to “Buy” from “Neutral” and increased its price target to $33 from $29, sending shares up 8.0%.

Process/Metrology/Motion Instrumentation Stock Index

The Process/Metrology/Motion Instrumentation Stock Index improved 2.1% in December, but fell 7.4% for the year to 395.70. For the month, four companies gained, three declined and Strategic Diagnostics remained unchanged. Zygo was the only company to post a double-digit gain, up 10%. Nanometrics led all decliners with a modest loss of only 1%.

For the year, three companies gained in stock price and five lost value. Strategic Diagnostics, Nanometrics and MTS Systems were the only companies to end the year in positive territory, up 42%, 25% and 10%, respectively. ICx Technologies weighed on the Index, losing 40% of its stock value despite only trading for two months. Zygo, RAE Systems and Veeco Instruments also recorded double-digit losses, falling 24%, 16% and 11%, respectively.

Perhaps due to the low valuations of certain stocks in the Index, several analysts initiated coverage of Index companies. On December 7, Broadpoint Capital initiated coverage of FEI with a “Buy” rating. On December 19, Morgan Keegan initiated coverage of ICx Technologies with an “Outperform” rating, while on the same day, JP Morgan initiated coverage of Veeco, but with a “Neutral” rating.

Laboratory Consumables/Equipment Stock Index

The Laboratory Consumables/Equipment Stock Index slipped 0.4% in December, but was still the best performing IBO Stock Index for the year, jumping 32.4% to close at 505.17. Four companies increased in share price, while three companies declined in December. Pall and Sigma-Aldrich were the only two companies to report significant gains, up 5% and 4%, respectively, while Millipore declined 11%. For the year, all seven Index companies showed double-digit gains in share price. In fact, Sigma-Aldrich and QIAGEN NV rose an impressive 41% and 29%, respectively.

Diversified Instrumentation Stock Index

The Diversified Instrumentation Stock Index slipped 0.3% in December, but ended the year up 19.5% to 119.50. In December, two companies traded higher and four companies lost value. AMETEK reported the only notable gain, rising 6%, while Agilent fell 3%. For the year, all six companies traded higher, five of which showed double-digit increases. On December 14, Robert W. Baird downgraded Mettler-Toledo to “Neutral” from “Outperform.”

International Shares

All five Pacific Rim companies lost ground in December, with Shimadzu and Techcomp leading all decliners, each down 9%. This month, seven European companies showed gains, while eight declined. Millbrook Scientific Instruments was the only double-digit gainer in December, improving 28%. Spectris and Sartorius AG showed the largest declines, falling 11% each.