Saturday, January 8, 2011

Immucor's End Markets Set for Recovery?




Immucor gave results recently and this stock saw a relief rally as investors came into buy. My reading of the earnings results is that top line growth looks weak as blood banks continue to feel cost restraints due to the macro-economy. Not only are blood banks and hospitals seeing funding constraints, but also they are seeing a forestalling of elective surgeries as patients and insurance companies feel the pinch.




Short Term Cyclical, Longer Term Secular Growth


Consequently, Immucor and Gen-Probe are interesting stocks within the health care space for a number of reasons. Firstly,  I see them as benefiting from a cyclical recovery in the economy. Secondly, longer term they will benefit from an increasingly ageing population. Finally, their end markets are less politically sensitive than those of, say, costly drugs getting state reimbursement. Moreover, Gen-Probe has a very exciting molecular clinical diagnostics business. Both companies are highly cash generative, have cash on their balance sheets and offer good longer term prospects. But are they stocks to buy now?




Immucor Q2 Earnings


In the first quarter Immucor disappointed the market be adjusting guidance for their latest automated instrument 'NEO' downwards to 80 to 120 instruments. Similarly, they lowered estimated sales for their older instrument 'Echo' to 140 to 180 orders. In this quarter, they reiterated the guidance



Our instrument orders generated in the second quarter were in line with our expectations. We continue to expect the rate of Echo orders to accelerate in the second half of fiscal 2011. Our fiscal 2011 Echo order expectations continue to be between 140 orders and 180 orders worldwide... ....We continue to expect to generate between 80 orders and 120 orders for NEO worldwide during fiscal 2011
In Q1 they received 26 Echo orders and 18 NEO orders, however in Q2 they received 29 Echo orders and 26 NEO orders.  So there is a pick up in growth in the latest generation instrument. This is positive and could see margins expand in instrument sales, however instrument sales are lower margin for Immucor and not really how they generate income. A quick look at their Q2 sales breakdown...


Fiscal Q2 2011

Fiscal Q2 2010
Revenue
Variance


Revenue
Gross
Margin

Revenue
Gross
Margin

$

%
Traditional reagents$ 49,64781.0%$ 51,36176.8%$ (1,714)(3)%
Capture reagents19,02979.1%20,00581.6%(976)(5)%
Instruments11,56522.6%10,02522.0%1, 54015%








...reveals that it is the reagent sales that really counts for their profitability. They managed to increase margins via cost cutting measures but with regards to top line growth they declared that


Our outlook for the U.S. market remains unchanged with expected industry weakness throughout fiscal 2011


Now, to a Growth At Reasonable Price (GARP) investor like me those words are chilling, but a value investor might not be so perturbed. Furthermore, as elective surgeries increase along with the economy than Immucor (and Gen-Probe) should do better. In addition, if this is the bottom of their cycle than buying them on a 5-6% free cash flow yield is hardly expensive!




Immucor a Stock to Buy?


All said, I prefer to be a bit cautious here and wait for some kind of confirmation from other sources (Gen Probe etc) as to how the hospitals and blood banks are faring with funding issues and how elective surgeries are performing. Immucor is definitely a stock to monitor, but with the US facing more austerity measures in 2011 I don't the hospitals and blood banks are out of the woods yet. There is still risk that Immucor could disappoint with instrument sales, given the weak outlook for the end customers.