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Haemonetics - Multiple Growth Drivers For Leader In Blood Management

|Includes:Haemonetics Corp (HAE)

Call: Buy Haemonetics (NYSE: HAE)
Current Price: $39.80 (Nov 13, 2013)
Price Target: $81

Haemonetics is a medical device company and a leader in the blood management space, providing an array of blood management technologies including diagnostic devices, blood and plasma center devices, and software for blood centers and hospitals. As of this time of writing, the company has a $2.06B market cap.

•Plasma collection tools - Plasma is essential for treatment for coagulation disorders such as Hemophilia, as well as immune blood disorders.
•Blood center products - Most blood donations come in the form of whole blood. Haemonetics markets the MCS (multicomponent collection system), which is a suite of tools that collects whole blood from a donor, and separating the blood into its components - platelets, red blood cells, plasma, etc. Haemonetics also has the ACP (automatic cell processor), which is a small bench-top device that automates the process of separating red blood cells and freezing them for storage, where they can be placed until needed for medical emergencies. The suite of tools also facilitates the storage of rare blood types that can be used for specific medical situations.
•Hospital products - these products are specifically used to help hospitals acquire and store blood. They include the TEG Thromboelastograph Hemostasis Analyzer, which takes patients' blood samples and measures their ability to clot blood; the Cell Saver System and OrthoPAT, both of which are automated systems used in salvaging blood during surgeries or other situations with massive blood loss.
•Software - these products include the IMPACT software platform, which tracks metrics associated with a hospital's blood management; the SafeTrace Tx, which manages the inventory and patient cross-matching ; and BloodTrack, which tracks the process of moving blood from a hospital inventory to the patients.

•The main competitors for Haemonetics' blood center products are Terumo BCT, Sorin Biomedica, Fresenius, all of which offer broad portfolios of blood management tools and services.
•For hospital products, ROTEM is a competitor which makes coagulation and platelet testing devices. Terumo BCT and Fresenius provide platelet and red blood cell collection services
•The automated blood salvage products OrthoPAT and cardioPAT compete against non-automated systems, as well as transfusion of donated blood. There are no competitors that offer the same automated solutions.
•The main competitors to Haemonetics' software products are MAK Systems, Mediware, Sunquest Information Systems, as well as applications that are developed independently by hospitals for blood management.

Drivers of growth:
•The recent acquisition of Pall Transfusion Medicine gives Haemonetics a 15% market share in the $1.2B whole blood collection market.
•The recent 510K approval of their new paperless phlebotomy device, in early fiscal 2014.
•Pending FDA approval of SOLX solution and Pall filter.
•The recent 510K approval of OrthoPAT device.
•The blood transfusion market, growing at CAGR of 5% per year. Due in part to the rise in the aging population.

Investment risks:
•Haemonetics has several competitors and competing technologies. There are risks and associated costs for potential acquisitions or partnerships that Haemonetics may try to pursue in order to maintain a competitive edge.
•Healthcare reform, particularly in the USA. A medical device tax is effective as of January 2013. Furthermore, reimbursements for the company's products could be lowered.
•On the other hand, the proposed expansion of coverage under the Affordable Care Act could increase the market of patients needing blood transfusions.
•Recent expenses have generated debt, therefore it may take a while for the company to realize the financial gain from such expenses. The company incurred $475M in debt to acquire Pall Corp's whole blood business. In May 2013, the company announced a Manufacturing Network Optimization Program, aimed to reduce manufacturing costs and improve supply chain inefficiencies.
•Possible loss of major customers. In fiscal year 2013, Haemonetics' ten largest customers accounted for 44% of their revenue, with its largest customer accounting for 10% of revenue.
•Haemonetics has operations in the US as well as worldwide. About 14% of revenues come from emerging markets. In FY 2013, 39% of the company growth came from emerging markets. Worsening economic conditions worldwide could affect company finances. Further, Haemonetics sells its products in several emerging economies such as Brazil, Russia, India and China, many of which have volatile financial markets.

Company Financials:

Let's take a look at Haemonetics' company financials. They have posted revenue growth of about 5%, 7%, and 22% in the years 2011, 2012 and 2013 respectively.

The revenues have been growing since 2010. If you look at the annual investor presentation from 2013, Haemonetics stock has grown by about 40% since 2008, compared to about 18% for the S&P 500. This represents about an 8% annualized return. Over the past 10 years, they have posted a CAGR of 10%.

•Revenue streams: 50% from North America, 25% Western Europe, 10% Asia, 14% Japan.
•WACC = 5.53% based upon: equity risk premium (weighted by region) = 6.95%, market value of equity $2.06B, market value of debt $227M (from straight debt and operating leases).
•Projected annual growth rate between 6-13%
•Base case: current growth rate at 8%. Price Target: $73
•Growth rate of 6% - Price Target: $59
•Growth rate of 10% - Price Target: $81
•Growth rate of 13% - Price Target: $94

At the current 5-year annualized growth rate of 8%, we set a price target of $73. Due to the recent acquisition and growth drivers, we believe the company is poised for annual growth rate of at least 10% percent, corresponding to a price target of $81.

Edited 11/13/2013: Note: This is a reduced version of a full report. Please contact the author for more details.

Disclosure: I am long HAE.

Stocks: HAE