Abaxis Remains Neutral

We recently reiterated our Neutral recommendation on Abaxis Inc. ( ABAX - Analyst Report ) based on its dependency on distributors which makes it difficult to establish a steady distribution network overseas.

The veterinary market is a major contributor to the company’s top-line growth. Abaxis sustained this trend and once again reported strong results in the quarter (up 19% year over year). North American veterinary sales were up 17%.

Alongside, the company’s new full-service laboratory testing facility, Abaxis Veterinary Reference Laboratories (AVRL), is complimenting the growth of the company’s veterinary segment. AVRL, in its second full quarter of operations, generated revenue of $470,000 (up 258% sequentially). With AVRL in full action, requisitions surged 241% and the customer base soared 130% on a sequential basis.

Moreover, the company witnessed a consistent increase in Piccolo placement. During the reported quarter, total revenue from the medical market remained flat year over year as uncertainty regarding the future direction of healthcare continued to affect the market for capital equipment within the physician office.

Notwithstanding this, the US medical team sold 264 Piccolos (including 10 sold to the government) in the reported quarter, up 52.6% year over year and 49.6% sequentially. With various core-marketing programs being undertaken, Abaxis expects placement rates to increase further.

However, we remain apprehensive about Abaxis’ dependency on distributors to sell its products. Abaxis had issues with its international distributors in the past, which makes it difficult to establish a steady distribution network overseas. Thus, failure in successfully developing and maintaining relationships with these distributors could adversely affect the company’s business.

Besides, the presence of many big players like Alere Inc. ( ALR - Snapshot Report ) and Idexx Laboratories Inc. ( IDXX - Snapshot Report ) that are endowed with greater resources on all fronts has made the human and veterinary diagnostic market highly competitive.

Recap and Outlook

The company reported a strong fourth quarter fiscal 2012 results with an EPS of 21 cents, up 40% year over year and beating the Zacks Consensus Estimate of 17 cents.Sales increased 14% year over year to $42.7 millionand surpassed the Zacks Consensus Estimate of $41 million.

The year-over year improvement was mainly on the back of balanced sales growth in both North America and in the international market. After several quarters of margin pressure, the gross and operating margins expanded, creating a sense of comfort for the company.

The company has not provided any outlook for the upcoming period. However the Zacks Consensus revenues and EPS estimates for the first quarter of fiscal 2013 remain at $41 million and 17 cents respectively.

Abaxis currently retains a Zacks #2 Rank, which translates into a short-term Buy rating.