Abaxis (ABAX) has disappointed investors over the past two years. The causes have been varied, be it competition, inventory, product delays, etc., but the result is that the company's poor execution has led to the stock trading at a significant discount to the major competitors - IDEXX Laboratories (NASDAQ:IDXX) and Heska Corp. (NASDAQ:HSKA), which are now trading at almost twice the valuation multiple of the Abaxis. Some of the recent fundamental developments at Abaxis seem to suggest that the company might have a shot at closing this gap and given the valuation difference, a closer look at the name seems apt.
Having a competitor that is almost eight times bigger in sales seems to be overshadowing some of the tailwinds enjoyed by the space in general. The market for diagnostics products to veterinarians is benefiting from growing pet ownership, with almost 65% of U.S. households owning pets, and increased spending by the pet owners on pet products and services, which has tripled since 1994. No wonder, veterinarians are spending on blood analysis systems that are getting sophisticated by the day, urine-testing equipment and other diagnostic devices.
The increasing investor interest around the broader pet products and services space is visible in names like Zoetis (NYSE:ZTS), a drug maker, Blue Buffalo Pet (NASDAQ:BUFF) that supplies pet foods, pet-insurer Trupanion (NYSE:TRUP) and VCA (NASDAQ:WOOF), but looking at the valuation across the food chain, Abaxis seems to be inviting the most skepticism, offering one of the best risk-reward ratios.
Issues are significant
Even though there are three major players in the industry, the market is mostly duopolistic in nature, with IDEXX and Abaxis as key players, but the competition between the two continues to pose a major challenge, more so for the stock than the actual business, given the difference in top line growth rate of competing products.
Abaxis, which benefited from IDEXX going for a direct distribution model, seems to be losing edge over the past few quarters and delays in providing two-way communication capabilities between diagnostic instruments and PMS (practice management software) did have a negative impact on the top line growth. IDEXX, in its efforts to become a one-stop shop for animal hospitals, has taken a lead with SediVue and remains focused on growing the installed base of capital equipment that may be followed by strong demand for consumables.
The updates and geographical expansion do hold promise
As for the sales process, since a sale of diagnostic instruments to perform tests is followed by the consumables for a number of years, a classic 'razor-razor blade' business model, there is significant value to even a low double-digit type of growth for instruments, as the case was for the company during the most recent quarter. As for the relative momentum, there are reasons to believe that the competitive dynamics may also change for the good.
New products and software upgrades do hold promise as far as regaining some of the competitive edge lost. The addition of the VedScan line has already arrested the weakness seen in veterinary sales late last year. The launch of the FUSE integration system, expected in late September, should fill the major technological void, i.e. communication between the diagnostic instrument and PMS, in the veterinary market.
The upcoming VUE platform, a reader for rapid assay tests that can be operated wirelessly by a smartphone or tablet, should not just help the existing rapid assay test product but also launch more products catering to the market over time.
Geographically, efforts to expand outside the U.S. should start to bear fruits over the coming quarters, even though the elevated level of spending on international sales and marketing is impacting the margin structure right now.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.