Why I'm Considering a Short Position in Immucor

Jun.26.07 | About: Immucor, Inc. (BLUD)

June has been an exciting month for Immucor (NASDAQ:BLUD). The company operates on a fiscal year ending May 31, so this month kicked off a new year and the company has already received FDA approval for its newest product that will drive revenue for the next several years.

The new product is called Echo and it is basically a smaller version of the company's flagship product Galileo. Both machines are used to test blood samples and are unique in that the process is fully automated, drastically reducing the human error effect which can be so dangerous in the high stakes medical testing market. While Galileo can run 60 to 70 tests per hour, the new Echo is only about to process about 16 per hour. This makes the machine only marketable to small to mid size labs, while the Galileo is typically installed in hospital labs with much higher volume.

The company has guided us to expect 250 orders for the Echo machine in the first 12 months after approval. They estimate the worldwide opportunity to be 6,000 instruments so the potential for this product could keep them busy for quite some time. Currently the company has manufacturing capacity to turn out a bit over 20 machines per month, but they are investing in additional capacity and expect to ramp up to 30-35 machines a month shortly.

Investors should expect a bit of a financial blip as the company begins selling Echo. Accounting standards have the firm booking the full cost of the machine when the order is completed, but the revenue stream is spread out over the next 5 years of useful life. Additionally, the company makes good margins on the reagents or consumable products that go with the machines. It is expected it will take a bit of time for the reagent orders to start pouring in as labs generally take a bit of time to get started using the new kits.

With all this excitement, one would expect the stock to be making new highs. In fact, the stock has been weak on some concerns popping up on the horizon. For starters, Bio Rad Labs (NYSE:BIO) just announced they are purchasing a Swiss company (DiaMed) which also makes laboratory tests including blood kits. This could be seen as a potential shot across the bow and may impact some of the positive pricing power Immucor currently enjoys.

Another point of concern revolves around whether small labs will be quick to sign up for the new product. While it is clear the product is effective and efficient, there is a pretty significant investment needed to be made in order to acquire the machine as well as the time it takes to train staff to use it. Many smaller labs will likely choose to stick with what continues to work until it is clear they need to buy the new machine to keep up with technology.

Finally, the CFO resigned effective 8/31/07 and while there doesn't appear to be anything negative forcing this resignation, it always raises a red flag and if nothing else, will be distracting to executives as they fill the position and get the new person up and running. The stock is not trading at a valuation that discounts strong growth and if there is a hiccup in that growth trajectory, it will likely face a multiple contraction. I would avoid the stock at this point and I am considering taking a short position if the timing is right.

BLUD 1-yr chart


Disclosure: Author does not have a position in BLUD