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Immucor Investors Out For Blood
It's not uncommon for Wall Street to strike unspoken bargains with certain companies in the healthcare space; If companies provide reliable, by-the-numbers performance, they will receive rich valuation multiples in return. That deal worked well for specialty diagnostics company Immucor (Nasdaq:BLUD) and its shareholders for many years, but has fallen apart since the company was beset by problems starting in 2009. Although the company had been making some progress, this latest quarterly report is likely to send the stock straight back to the penalty box for some time. (For background reading, see The Ups And Downs Of Biotechnology and Investing In The Healthcare Sector.)
IN PICTURES: 9 Simple Investing Ratios You Need To Know
The Quarter That Was
Immucor reported that sales rose only 1% for the fiscal first quarter, falling slightly short of the average estimate on the Street. Although the company saw decent growth in instrument sales (up 18%) with the ongoing launch of the Neo, traditional reagent sales fell 9%. That's a problem given that this figure represents almost 60% of total revenue. Capture reagent sales did better, though, with 18% growth. What was more worrisome was the company's shortfall in instruments and the lower guidance for system sales throughout the year. New machine sales fuel future reagent sales, so a reduction in system sales has broad implications for future profits.
Below the top line, performance did not improve. Gross margins fell a bit from last year as the company saw lower machine margins. What makes that even more problematic is that the year-ago margins were hurt by process improvement spending, so it should have been an easier comp. Operating expenses were likewise up 4% and operating income declined more than 3%.
The Road Ahead
As the more innovative half of a duopoly that effectively controls blood typing reagents in the United States (at least ahead of Bio-Rad's (NYSE:BIO) expected eventual entry), Immucor should be a classic wide-moat stock. Unfortunately, the company has taken repeated blows since 2009.
In addition to a government antitrust inquiry, Immucor was smacked hard by the FDA for serious deficiencies in its quality control process. During the company's conference call, the CEO revealed that although the FDA acknowledged the company's progress in a recent re-inspection, there are still significant deviations and the company could face serious sanctions in the future. Just ask Genzyme (Nasdaq:GENZ) or Boston Scientific (NYSE:BSX) how much fun the FDA can be to deal with in such cases.
Making matters worse, the company is now lowering guidance and talking about an overall economic impact on its business. There is no doubt that there is an element of truth to this. Surgeons are constantly working to reduce donor blood requirements during surgery (which means fewer blood typing tests and lower reagent sales for Immucor), and the volume of surgeries has certainly fallen through this recession as workers lose insurance, become unable to afford copayments, or believe they cannot take the time off for recuperation. (For related reading, see Economic Moats: A Successful Company's Best Defense.)
Unfortunately, while this explanation is valid, Wall Street is not going to want to hear this. Immucor has had a credibility problem with the Street already, and hearing things like the need to "reassess our approach to the market" are not going to make things better. Moreover, the lingering FDA issues up the risk involved, as the FDA is clearly not a soft, cuddly pushover these days.
The Bottom Line
With the expected market reaction to these earnings, Immucor is going to once again fall to the level where it looks cheap. If the company can effectively muck out the stables and get back to being a steady and reliable producer of earnings and share gains, the stock can do well. Immucor is leading the drive to automate the immunohematology market and has a valuable franchise. Moreover, the longer the company lingers, the more likely it is that another diagnostics company (like, say, Abbott Labs (NYSE:ABT) or Gen-Probe (Nasdaq: GPRO)) will consider a bid.
By the same token, any investors considering Immucor now must have patience and a high pain threshold. Immucor is earning a bad reputation with the Street and it will take several quarters of relatively spot-free performance to reverse that. The company has the technology and products to do this, but now it must show that it has the capabilities to match. (For related reading, see 3 Stocks That Wall Street Analysts Love.)
IN PICTURES: 9 Simple Investing Ratios You Need To Know
The Quarter That Was
Immucor reported that sales rose only 1% for the fiscal first quarter, falling slightly short of the average estimate on the Street. Although the company saw decent growth in instrument sales (up 18%) with the ongoing launch of the Neo, traditional reagent sales fell 9%. That's a problem given that this figure represents almost 60% of total revenue. Capture reagent sales did better, though, with 18% growth. What was more worrisome was the company's shortfall in instruments and the lower guidance for system sales throughout the year. New machine sales fuel future reagent sales, so a reduction in system sales has broad implications for future profits.
Below the top line, performance did not improve. Gross margins fell a bit from last year as the company saw lower machine margins. What makes that even more problematic is that the year-ago margins were hurt by process improvement spending, so it should have been an easier comp. Operating expenses were likewise up 4% and operating income declined more than 3%.
The Road Ahead
As the more innovative half of a duopoly that effectively controls blood typing reagents in the United States (at least ahead of Bio-Rad's (NYSE:BIO) expected eventual entry), Immucor should be a classic wide-moat stock. Unfortunately, the company has taken repeated blows since 2009.
Making matters worse, the company is now lowering guidance and talking about an overall economic impact on its business. There is no doubt that there is an element of truth to this. Surgeons are constantly working to reduce donor blood requirements during surgery (which means fewer blood typing tests and lower reagent sales for Immucor), and the volume of surgeries has certainly fallen through this recession as workers lose insurance, become unable to afford copayments, or believe they cannot take the time off for recuperation. (For related reading, see Economic Moats: A Successful Company's Best Defense.)
Unfortunately, while this explanation is valid, Wall Street is not going to want to hear this. Immucor has had a credibility problem with the Street already, and hearing things like the need to "reassess our approach to the market" are not going to make things better. Moreover, the lingering FDA issues up the risk involved, as the FDA is clearly not a soft, cuddly pushover these days.
The Bottom Line
With the expected market reaction to these earnings, Immucor is going to once again fall to the level where it looks cheap. If the company can effectively muck out the stables and get back to being a steady and reliable producer of earnings and share gains, the stock can do well. Immucor is leading the drive to automate the immunohematology market and has a valuable franchise. Moreover, the longer the company lingers, the more likely it is that another diagnostics company (like, say, Abbott Labs (NYSE:ABT) or Gen-Probe (Nasdaq: GPRO)) will consider a bid.
By the same token, any investors considering Immucor now must have patience and a high pain threshold. Immucor is earning a bad reputation with the Street and it will take several quarters of relatively spot-free performance to reverse that. The company has the technology and products to do this, but now it must show that it has the capabilities to match. (For related reading, see 3 Stocks That Wall Street Analysts Love.)
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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