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One Stock For Your Thanksgiving Watchlist

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November 24, 2010 – Comments (2)

One Stock For Your Thanksgiving Watchlist
Haemonetics (NYSE: HAE)


Blood management sounds like the title of a Stephen King novel. But in this case, it represents an investment opportunity; one that I have been keeping my eye on.

The company

Haemonetics (NYSE: HAE) is actually in the business of blood management. The company develops and sells blood management solutions to hospitals, plasma centers, blood banks and biotechs. Face it: We need blood to live. And whether you are going in to donate blood or have a surgical procedure done, there is a good chance that Haemonetics may be involved in one way or another.

On the razor’s edge

Haemonetics' solutions come in the form of a razor-and-blade-style model. It sells equipment to hospitals and blood banks (the razor), then realizes recurring sales of the single-use consumable devices that go with the equipment (the blades). To top it off, it offers the software solutions to manage the whole process. And lest you think that hospitals can just buy the equipment and then skimp on cheaper disposables, it doesn’t work that way. The equipment only works with HAE disposables, so they don’t have to worry about cheap substitutes taking over.

If we look at the past couple of years we see that disposables have made up a considerable portion of the company’s sales. In fact, disposables made up almost 87% of revenues, equipment close to 8% and software solutions the rest. So with the one-and-done disposables, you get that recurring revenue stream which we love to see; one-time use, proprietary consumables that donor centers or hospitals have to keep in stock. I mean why have the equipment if you can’t use it?

Well-equipped

Speaking of equipment, this is another area where the company shines. Haemonetics is getting more and more of its blood salvage systems like the CellSaver, CardioPAT, and OrthoPAT into hospitals. Blood salvage is a process whereby the patient's blood, specifically red blood cells, lost during and after surgery is cleaned and prepped for transfusion back into the patient. This is a growing alternative to traditional methods where patients normally depend on blood donors, and hospitals don't have to delay surgery because of a blood shortage.

The way I see it, the population is continuing to grow, and you can't stop Father Time. A growing and aging population is good for Haemonetics because it should keep boosting demand for its products. Companies like Stryker (NYSE: SYK) will supply this aging population with orthopedic implants such as knee and hip replacements, and Medtronic (NYSE: MDT) will take care of it with stents and pacemakers. All of these require surgery, and this is where Haemonetics' products will prosper. Its competitive advantage lies in its size and laser-like focus on one particular thing: blood.

And the company isn’t stopping here either. It has also licensed and is in the process of developing a laser blood typing system that management estimates could be an additional $1 billion market opportunity. This should add nicely to the top line and if they can keep EBIT margins in the historical 15%-16% range the stock should have some room to run. I think they can do this through scale and a continued focus on operating efficiencies. The balance sheet is in great shape with just about $100 million in net cash.

How much can this be worth?

When I first started looking at Haemonetics the stock was trading right around $55 and about 18 times free cash flow and a discounted cash flow analysis had the stock pegged as pretty fairly valued, if not even a little rich. Since then the stock has traded up to $58.50, more or less matching the S&P’s performance in that time. Over the past five years though the stock has outperformed the market substantially and I attribute this to the fact that health-care-related stocks tend to outperform in tougher economic times because they are not so discretionary. Today it’s trading closer to 22 times free cash flow which I think is still reasonable considering the market the company serves.

Who runs this show?

As with any investment, I like knowing a little about management and their goals. CEO Brian Concannon has been with the company for 18 years back to when it was owned by American Hospital Supply Corporation and subsequently spun off, and has held the CEO position since April 2009. Executive compensation looks to be reasonable and incentives are heavily weighted toward total revenue as well as operating income goals. I wish insiders held more than 0.5% of shares outstanding. It is always nice to see management owning a chunk of the company as it aligns their interests with shareholders. Unfortunately this is not the case with Haemonetics.

What are the risks?

This is a well run company in a very defined market and as technology progresses, Haemonetics will need to do the same or risk getting pushed out. It is also worth knowing that for the company’s fiscal year 2010 the Japanese Red Cross Society represented 14.3% of total revenues and has historically accounted for a significant portion along these lines. Any erosion in this relationship could certainly affect Haemonetics, though the relationship appears to be solid.

Will this ever be a buy?

The bottom line is that Haemonetics is a leader in its field with 60% market share in the global plasma market, 40% share in the platelet market and 75% of the automated red cell market. The company offers a great way to get some healthcare-type exposure to the portfolio without relying so much on the "what-ifs" of healthcare legislation. I am starting to think that this might be one of those companies that is always going to demand a bit of a premium. That said, the cheapskate in me wants to wait this one out for a bit longer and see if I can’t get a better price.

2 Comments – Post Your Own

#1) On November 24, 2010 at 12:32 PM, donggan wrote:

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