BECKMAN COULTER INC. $64 (New York symbol BEC; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 62.7 million; market cap: $4.0 billion; WSSF Rating: Average) makes lab equipment that doctors and medical researchers use to detect substances in bodily fluids.

The company sells most of its products to big hospitals and research laboratories. It has now installed more than 200,000 of its systems in over 130 countries.

Beckman’s products aim to simplify and speed up complex tests. In fact, some of these systems can process over 1,400 chemical tests an hour. More timely and accurate information leads to faster treatment and can reduce a patient’s hospital stay.

As well, many of Beckman’s automated machines require little human interaction and can work 24- hours-a-day. That helps hospitals and other healthcare providers cut their labor costs.

Testing equipment accounts for 80% of Beckman’s total revenue. The remaining 20% comes from its life sciences division, which supplies a wide range of lab equipment to drug and biomedical researchers. About half of this division’s customers are universities and government-funded research labs.

Lease change spurred sales

Beckman’s sales grew from $2.2 billion in 2003 to $2.8 billion in 2007. Much of that growth came from a change in the way it leases its systems. Instead of an upfront payment at the start of a lease, customers can now spread their payments over the lease term, which is typically five years. The change made Beckman’s equipment more affordable. The company now leases nearly all of its equipment under this new method.

Earnings rose from $2.82 a share (total $181.9 million) in 2003 to $3.21 a share ($210.9 million) in 2004. The new leasing method cut Beckman’s earnings in 2005 to $2.94 a share ($188.5 million). However, earnings improved to $3.25 a share ($211.3 million) in 2007.

Beckman lumps in payments under its new leasing method with sales of replenishible supplies and test kits. These revenues accounted for 78.3% of its total revenue in 2007, up from 76.5% in 2006. While other companies also make supplies for Beckman’s systems, Beckman’s large customer base and strong reputation give it an advantage.

Research spending keeps it ahead

Beckman must continually develop new products to compete with much larger medical equipment companies. In 2007, Beckman’s research spending rose 3.4%, to $274.0 million (9.9% of revenue) from $264.9 million (10.5% of revenue) in 2006.

This research has led to several successful new products in the past few years. For example, in 2007 Beckman launched a mid-range testing system aimed at smaller hospitals and labs. These customers account for 45% of the worldwide demand for chemical analysis machines.

Beckman also has high hopes for a fully automated, “sample-to-result” molecular diagnostics system for clinical laboratories. It has earmarked $15 million to $20 million of its annual research costs to this product, which should be ready in 2010.

Besides research, Beckman also uses acquisitions to expand its technical expertise. In 2007, it paid $36.0 million for the remaining 80.1% of Nexgen Diagnostics LLC. The acquisition gave Beckman access to proprietary technologies that could simplify chemical testing systems.

Beckman also purchased the flow cytometry operations of Dako Denmark A/S. Flow cytometry products analyze cells in blood and other fluids to detect diseases such as leukemia, lymphoma and HIV. The company did not reveal the final price since it is still working out the details.

Strong balance sheet will fuel growth

Beckman’s strong balance sheet will let it continue to expand research and make acquisitions. Long-term debt of $888.6 million is a reasonable 22% of its market cap. The company also held cash of $83.0 million or $1.32 a share at December 31, 2007.

Beckman is also an aggressive buyer of its shares, which helps offset the dilution of its employee stock option plan. It spent $57.3 million on buybacks in 2007, and will likely spend a similar amount in 2008.

Takeover speculation helped push Beckman’s stock to an all-time high of $77 in July 2007. It has moved down lately, partly due to a slowdown in academic research funding which could hurt earnings growth at Beckman’s life sciences division.

It now trades at 17.8 times its forecast 2008 earnings of $3.60 a share, and at 1.5 times its revenue of $43.40 a share. That’s cheap in light of Beckman’s high research spending and leading market share. The $0.68 dividend yields 1.1%.

Beckman Coulter is a buy.