Home Diagnostics' Target Upped

We expect Home Diagnostics, Inc.’s (HDIX - Snapshot Report) earnings to be back-end loaded during 2008, due to seasonal issues and heavy selling and marketing expenses in the front half of the year. In January, HDIX negotiated a new exclusive co-branding agreement with Rite Aid Corp. (RAD - Analyst Report), which should help volumes in the second half of the year.

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 & Johnson (JNJ - Analyst Report) and Medtronic Inc. (MDT - Analyst Report) will also likely pressure the top- and bottom-line. Increased consumer awareness will continue to fuel this group over the long-term.

Management guidance for 2008 EPS also reflects an assumed higher tax rate, lapsing of the research and development tax credit, and the tax benefit received in the first quarter. Our EPS estimate remains unchanged.

Given the risk factors, and low growth outlook, we believe the company will finish the year at the top of its guidance range. However, due to competitive factors, the stock should trade at a discount to comparables. At a 20-30% discount to the group average 1.3x 2008 P/E/G, we believe HDIX is fairly valued at $8.50. Our rating on the stock is Hold but our target price increases to $8.50.

Read the full analyst report on HDIX

Read the full analyst report on RAD

Read the full analyst report on JNJ

Read the full analyst report on MDT