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On Mar 28, we reiterated our long-term Neutral recommendation on Abaxis Inc. (ABAX - Analyst Report) following healthy third quarter fiscal 2013 results. This manufacturer of portable blood analysis systems for human medical and veterinary purpose carries a Zacks Rank #3 (Hold).

Why the Reiteration?

On Jan 31, Abaxis reported third-quarter fiscal 2013 EPS of 22 cents, a beat of 10% over the Zacks Consensus Estimate. The result also sailed past the year-ago EPS by 69.2%. Revenues surged 32% year over year to $49.8 million, surpassing the Zacks Consensus Estimate of $46 million in the quarter.

Abaxis serves a niche market with low worldwide penetration supporting solid growth across all geographical regions. Considering its distribution relationship with MWI Veterinary Supply (MWIV - Analyst Report) and Abbott Point of Care, a part of Abbott (ABT - Analyst Report), the company is well poised to expand its foothold in target markets. Abaxis’ focus and investment towards further penetration of the North American and overseas markets should continue to support the current double-digit growth trend in the future.

The company’s mainstay veterinary segment (accounting for 80% of total revenues) continues to record robust growth. Increasing service revenue from Abaxis Veterinary Reference Laboratories (AVRL) is another upside. Under the medical segment, Piccolo system placements remained at an encouraging level with higher uptake across North America as well as Europe. The company is also working on getting large-scale business for Piccolo.

On the tepid side, Abaxis’ gross margin went downhill for the second consecutive quarter due to unfavorable product mix in the vet market and lower average selling price in the medical market.

Additionally, the company’s is highly dependent on distributors like Henry Schein (HSIC - Analyst Report) in various countries. Over-reliance on sole distributors in lucrative target markets and failure to maintain a healthy relationship is another cause of concern. Moreover, the competitive environment remains tough. Despite a strong quarter with several takeaways, looming concerns keep us on the sidelines.

There was no earnings momentum over the last 30 days. The Zacks Consensus Estimate for 2013 and 2014 is currently pegged at 80 cents and $1.13 per share. The estimates represent respectively a year-over-year increase of 37.4% and 41.2%.

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