Haemonetics Stays Neutral

We reiterate our Neutral recommendation on Haemonetics (HAE - Analyst Report) although the company is witnessing several near-term headwinds.

Haemonetics’ revenues were impacted by the voluntary recall (announced in May 2011) of OrthoPAT devices manufactured prior to 2002. The decision to recall the products was prompted by its repair history that led to customer dissatisfaction. In addition, Haemonetics had to substitute its HS core bowl with a more costly product in response to some customer complaints about instances of particulate found in plasma collected in the HS bowl.

The company has identified the root cause of the issue and the corrective plan is expected to be completed by the end of the fiscal. Until then, margins will continue to remain under pressure as the product substitute is pricier. The company had initially underestimated the impact of these two quality related issues. As a result, Haemonetics reduced its EPS and operating income outlook for fiscal 2012 to $3.00−$3.10 (previous guidance of $3.35−$3.45) and $110−$112 million ($124−$125 million), respectively. The revised guidance takes into account the $13 million ($0.37 per share) impact of quality issues, higher than the previous forecast of $10 million ($0.25 per share). The impact from these headwinds could aggravate if the company witnesses any further hiccup in its recovery plan.

Low global penetration and demand outstripping supply make for a positive long-term thesis for investing in the blood processing industry. Haemonetics remains focused on blood management solutions in order to provide better services to customers. The company’s web-based blood management portal, IMPACT Online, has witnessed greater acceptance among customers.

During the most recent quarter, the company added 18 new IMPACT accounts, resulting in a total of 226. Some of the renowned institutions who have recently implemented IMPACT accounts or have benefited from it include Holy Cross Hospital in Florida, Comprehensive Care Services of Michigan (the second-largest US profusion service provider), John Hopkins Hospital and Engelwood Hospital.

A stable cash balance coupled with strong free cash flow generation has enabled Haemonetics to look for suitable acquisitions, which should further drive its top line. We are also encouraged by the company’s long-term outlook, based on which investments are being made in automated whole blood collection system.

Read the full analyst report on HAE