Haemonetics (HAE), known for designing, developing, manufacturing, and marketing automated blood component collection devices, is boosting growth opportunities for this fiscal year through its segment-specific strategy and cost saving initiatives. The revenue bifurcation from its various segments is as follows.
This year, the company will focus on other segments like hospital rather than its major sales contributor, the blood bank segment. This is due to its recent acquisition of Pall's (PLL) transfusion medicine business and Hemerus, which specializes in SOLX technology. It is planning increased concentration through products like its cell salvage system and Thrombelastograph, or TEG, diagnostic solutions, based on its strong free cash flow generation.
Growing Hospital Market
Overall, the U.S. hospital market represents a $600 million opportunity moving forward, of which Haemonetics possesses a 25% market share. In the hospital segment, Haemonetics supplies equipment and related disposables, software, and consulting services, in order to improve operational management and reduce blood-related costs at various hospitals. Equipment includes blood management systems like Cell Saver, OrthoPAT, and cardioPAT. These are specially designed to rescue the patient's own blood lost during surgery, also called auto transfusion. This helps the hospitals save money as allogeneic blood will cost over $1,400 per surgery, which is the hospital's responsibility and carries a higher level of risk for complications.
Analyzing the opportunistic view on this hospital market, proved difficult in quantifying various aspects since implementation at various levels are different from hospital-to-hospital. Therefore, I considered analyzing the company's cell salvage product, a device that helps in avoiding allogeneic blood transfusions and can sequester platelet-poor and platelet-rich plasma.
U.S. Hospital Cell Salvage Market Opportunity
Procedures per week
Average cell salvage Consumption
No. of Weeks
No. of Hospital in the U.S.
Total U.S. Market
Assuming nearly four high-blood-loss procedures each week, requiring $350-worth of cell salvage products, the domestic market alone will pose an over $400 million market. This calculation does not include markets outside the U.S. On the other side, the emerging markets are experiencing increased number of procedure volumes, which we can expect will lead to double the market size of the domestic opportunity. Still, looking at fiscal year 2013, the revenue from this segment was around $100 million, reflecting less penetration for Haemonetics' cell salvage products. I expect the company will consider this aspect as revenue potential based on its growing demand in the coming years.
Along with the cell salvage opportunity, the TEG diagnostic solutions are also gaining traction. It provides complete blood hemostasis testing, which is helpful in assessing bleeding and thrombotic risks. The company believes that the market for this product will become $1 billion globally by 2017. While presently, Haemonetics penetration in this market is a tiny fraction of a mere $25 million - $27 million. One of the key drivers for TEG's growth is the increase in interventional cardiology in China. In the past two years, the company doubled its TEG revenue from this market. This has helped the TEG business grow at low double-digit compounded annual rate since acquiring this business from Haemoscope in 2007. Henceforth, it is expected to post over $32 million in the current fiscal year.
Note: In this analysis, I have not considered the incremental revenue from the company's I.T. and consulting solutions attached with these products, since Haemonetics includes it in a different business segment.
Along with sales growth initiatives, Mr. David Helsel, Vice-President of Global Manufacturing at Haemonetics, aims to streamline its manufacturing operations, which will provide massive support to the company's cost-cutting initiative. In the past month, he outlined six major projects, which will transform Haemonetics' manufacturing design, and will drive the anticipated $35 million in annual savings. These include:
1) Moving equipment manufacturing to a single contract manufacturer
2) Shifting the production of disposables to the Tijuana site
3) Expansion of Tijuana site for additional manufacturing
4) Developing a manufacturing site in the Asia-pacific region
5) Capitalizing on supply chain improvements, or efficiencies
6) Establishing a Technology Center of Excellence
Out of these, there are two major programs designed to drive about 60% of the anticipated cost savings. This includes outsourcing the current production to its Tijuana site, which is presently done at Braintree, and supply chain improvements. The outsourcing plan will help reduce cost by about $7 million, while the supply chain strategy will bring in $14 million of savings.
The outsourcing of manufactured equipment from Braintree will take approximately 18 months from now. This task will be done in three phases taking around six months each -- initiating with older equipment and moving to newer, more advanced products.
Another thing to consider is there are a number of products currently manufactured in Braintree, which are based on old designs. Along with cost reduction initiative, the company's management will be able to leverage its engineering expertise from its global manufacturing partner, in order to redesign a few of its products. These will enable them to produce more efficiently, and continue to focus on reducing costs.
Moving on to the supply chain improvement strategy, currently Haemonetics is facing rising costs of raw material and rising prices of electronics and customized item purchased from third parties. To address this rising cost problem, the company will focus on expanding its procurement capabilities, and organizing those professionals into groups. This will help them in gaining expertise in key raw materials and components, along with developing a secondary source also.
Free Cash Flow Implications
In fiscal year 2013, Haemonetics generated nearly $84 million of free cash flow. Going forward, the management expects an increment of more than $30 million of free cash flow in this fiscal year. These increments will be prior its business investments planned for this year worth $88 million, supported by its cash and cash equivalents of about $180 million. Of these, $11 million have been designated for completing the integration of whole blood business. While the remaining $77 million will be split between capital and operating expense, which are related to the company's manufacturing and efficiency programs.
Overall, it is estimated that Haemonetics will be spending roughly between $150 million - $160 million over the coming three years period, which will be nearly double its free cash flow during that period.
By fiscal year 2017, the spending associated with these initiatives will decline, and management expects to experience doubled free cash flow around $180 million - $190 million.
Fiscal 2014 outlook
For this fiscal year, Haemonetics is anticipating a revenue boost of 9% to 12%, reflecting growth in all its segments. These figures are based on revenue upside of 4% - 6% from plasma segment, 6% - 9% from the hospital segment, 5% - 7% from software solutions segment, and flat low single digit revenue growth from the blood center segment. Overall, the company is expected to cross the $1 billion revenue mark for the first time, and generate $125 million in free cash flow. These figures exclude the effect of amortization from the deals, and one-time restructuring costs, leading to long-term benefits.
Stock Price performance
Looking at the history, Haemonetics stock price performance has been very defensive; it traded at a premium to the market until the past week.
The stock had a recent run up to $45.81, which was an all-time high, on July 25, 2013. Positive catalysts like acquisitions and a 2:1 stock split supported the growth run. In May, Haemonetics posted 4% organic growth, which boosted some confidence in investors leading to share regaining its level from a previous fall in January, due to mere 1% organic growth in the third quarter of fiscal year 2013.
The graph depicts a roughly flat year to date performance with much of the space having a moderate-to-good run. Based on the company's dominant market share, and growth opportunities lying ahead, I believe that Haemonetics premium pricing is fairly warranted. Therefore, I believe there is room for its stock to move higher in the near future.
Comparative Peer Valuation
Thoratec (THOR) and Haemonetics belong to the same medical instruments and supplies industry. Their market capitalizations are at similar $2.2 billion levels. This is my base for doing a comparative analysis on these companies. For this, I am considering the enterprise value, or EV to EBITDA, and EV to revenue multiples. Both the ratios have similar characteristics of "the lower, the better" in terms of valuation. Thoratec has an EV of $2.09 billion, while Haemonetics' EV stands at $2.50 billion. Though the latter has a high EV, its EV to EBITDA multiple stays impressive at 13.40 times compared to its peer which is at 15.69 times. Even on EV to revenue multiple basis, Haemonetics has a better ratio at 2.69 times, compared to Thoratec ratio of 4.22 times. This shows that Haemonetics has good valuations to support its futuristic fundamentals, in comparison to its peer company.
Risks to this Thesis
Investment risk: Haemonetics had two product quality issues that just reached resolution, and more quality issues would be damaging to its long-term growth potential. In addition, the company is making a huge investment to automate whole blood collection, a market that is dominated by manual collection and may be difficult to convert.
Inventory Risk: As per the present scenario, Haemonetics utilizes more than 600 suppliers, which include those representing single source relationships. This poses as a huge threat, and requires a certain level of "security inventory." It is aiming to reduce inventory cost by developing relationships with multiple suppliers for those items.
Balance Sheet: Haemonetics has a conservative balance sheet. Looking at the history, it's has a negative net-debt-to-EBITDA ratio, based on the past five years. In August last year, the company entered into a $475 million term loan facility, to fund the Pall acquisition. With $187 million cash on the balance sheet, and a free cash flow estimate of $125 million, the company has enough flexibility.
Revenue Trends: As per the past history, the revenue growth rates have been steady. In the last five years, Haemonetics experienced 12% revenue growth, and 10% revenue growth based on past 10 years, along with EPS growth of 13% and 6% respectively. The problem here is that neither the top line nor the bottom line has shown much acceleration, which may pose a risk to the company's future revenue and earnings anticipations.
At current levels, I believe valuation appears reasonable, and expect modest multiple expansion as the company executes its guidance and launches a critical product.
In my opinion, Haemonetics will be able to sustain its anticipations going forward due to:
1) Revenue growth opportunities of mid to high single digits
2) Strong cash flow generation supporting its investments in infrastructure, product development, and commercial opportunities
3) Cost-cutting initiatives benefiting the future EPS growth from the high single digits to the low double digits
Henceforth, I believe that at current prices, this stock is highly attractive, and should be considered a part of your investment portfolio.
With supportive outlook for the coming years, I recommend a buy for this stock.