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Haemonetics Remains Neutral

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Recently, we reiterated our Neutral recommendation on Haemonetics (HAE - Free Report) with a target price of $75.00. Haemonetics began fiscal 2013 on a disappointing note with both adjusted EPS of 55 cents and revenues of $176.5 million lagging the Zacks Consensus Estimates.

After witnessing a challenging scenario during most of last year, Plasma, accounting for 44% of disposables, is now on the path to recovery. Although plasma growth was adversely affected by higher inventory purchase by the Japan Red Cross Society (‘JRC’) in the last quarter ahead of a system conversion, we are impressed to note that growth in North America returned to mid-single digits. The company also made commendable progress with respect to contract extensions as 98% of this business is covered through the third quarter of fiscal 2015.

Haemonetics remains focused on blood management solutions in order to provide better services to customers. During the reported quarter, the company added 8 new IMPACT accounts, resulting in a total of 266. This is encouraging as sales derived from the IMPACT accounts has been much higher than non-IMPACT accounts during the quarter – for both blood centers ($537,000 versus $82,000) and hospitals ($100,000 in sales, almost three times more than a non-IMPACT account). Revenues from Diagnostics (consisting principally of TEG or Thrombelastograph Hemostasis Analyzer) increased, driven by the deeper penetration of IMPACT (blood management system) accounts in North America and significant growth in China.

We believe that after the acquisition of the transfusion medicine business of Pall Corporation for $551 million, Haemonetics will be able to enter the $1.2 billion whole blood collection market. Manual whole blood collection accounts for the vast majority of the nearly 60 million red blood cells collection procedures performed annually worldwide. The acquired business generated approximately $210 million in annual revenues spread across the Americas ($136 million), Europe ($52 million) and Asia ($22 million) and 15% of global unit market share. We believe that the entry to this attractive market should drive the company’s top line going ahead.

We are also impressed by emerging markets being an area of key focus for Haemonetics. Sales momentum from this region continued and increased by 16% during the reported quarter (to $30 million in revenues). We also note that the robust growth of Diagnostics is based on the 70% growth of TEG revenues in China, which is penetrating deeper into the field of interventional cardiology. Over the next five years, business from China is slated for a CAGR of 20−25% driven by sales from platelets, cell salvage and TEG.

However, margins continued to remain under pressure due to increased investments associated with global growth initiatives, expansion in emerging markets and infrastructure development. Besides, the uncertain economic scenario continues to pose a challenge for Haemonetics.

The stock carries a Zacks #3 Rank (‘Hold’) in the short term.

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