HDIX Is Fairly Valued

Home Diagnostics, Inc. (HDIX) reported fourth quarter EPS better than expected primarily due to a lower tax rate. Seasonal issues and heavy selling and marketing expenses in the front half of 2008 makes 2008 a back-end loaded year.

In January 2008, HDIX negotiated a new exclusive co-branding agreement with Rite Aid, which should help second half 2008 volumes. Management adjusted its full year 2007 financial guidance. It now expects total revenue to be approximately $115 million, down from previous guidance of $120-$123 million, and adjusted earnings per diluted share to be $0.53-$0.54, down from previous guidance of $0.60-$0.64. Adjusted EPS excludes the insurance settlement. Management provided 2008 financial guidance.

It now expects total 2008 revenue to be approximately $123-$126 million, and adjusted earnings per diluted share to be $0.50-$0.52. Management expects the majority of revenues and EPS to be weighted toward the second half of 2008 due to seasonality and new product launches. The guidance also reflects an increase in the effective tax rate to 35% from 26%, given the R&D tax credit has not been extended for 2008.

Guidance for 2008 EPS reflects an assumed higher tax rate absent reinstatement of the R&D tax credit. Our estimates decline, as does our target price. However, the company doesn't appear to be able to leverage expenses. Customer consolidation also reduces the growth outlook.

We expect increased competition from Johnson and Johnson (JNJ - Analyst Report) and Meditronic, Inc. (MDT - Analyst Report) will also likely pressure the top- and bottom-line.

Given the risk factors, and low growth outlook, we believe the company should trade at a discount to comparables. At a 20%-30% discount to the group average 1.5x 2008 P/E/G, we believe HDIX is fairly valued at $7.25. Our rating on the stock is Hold.

Read the full analyst report on HDIX.
Read the full analyst report on JNJ.
Read the full analyst report on MDT.

Read the full analyst report on HDIX