TRUMY - Haemonetics Executing Well But Valuation Dogged By Concerns About A Large Customer

Summary

• Haemonetics surpassed sell-side expectations with healthy revenue growth from Plasma and Hospital, but margin leverage was lacking due to the ongoing impact of inflation and supply chain issues.
• The company extended its non-exclusive supply agreement with CSL for another two years, but no terms have been disclosed and CSL revenue is still set to decline as it switches suppliers.
• Vascade is still a major driver, with leverage to increased EP use of vascular closure devices and overall procedure growth.
• Haemonetics looks undervalued on long-term high-single-digit revenue growth and low-30%s EBITDA margins, but diversifying the revenue base remains a high-potential high-risk opportunity.

As procedure volumes normalize and plasma donors return, Haemonetics ( HAE ) continues to post good revenue results, though operating leverage continues to be limited by cost inflation and supply chain challenges. The announcement of an extension to the non-exclusive sales agreement with CSL ( CSLLY ) tempers this risk in the near term, but the reality is that there’s still a coming cliff for a meaningful portion of the company’s revenue.

I still think Haemonetics is a below-the-radar name worth a closer look. The shares have risen a bit since my last update , but have slightly underperformed the broader med-tech universe. I like management’s plan to reinvest in both growth and diversification through M&A, but I also do recognize that med-tech valuations are more stretched now. That’s not as much of a concern for me with Haemonetics, though, and I think the valuation still makes this a name that merits a closer look.

Mixed Fiscal Third Quarter Results On Weak Operating Leverage

Revenue rose 18% as reported in the fiscal third quarter, or 21% in organic terms, which was about 2% better than the Street expected. Growth was driven by the Plasma business, which grew over 42%, while Blood Center grew 3% and Hospital grew over 14%. The small Services business contracted slightly.

Despite the better revenue from a consumables-driven model, gross margins came up short. Gross margin declined 240bp yoy and 120bp qoq to 52.5%, missing by 150bp, as the company continues to see input cost inflation and supply chain challenges that are forcing less-efficient spot buys. Operating income barely grew, missing by 2%, with margin down 330bp yoy and 110bp qoq to 19.3%, missing by 80bp, as good discretionary cost management couldn’t offset the gross margin headwinds.

With strong trends in the business, particularly in the Plasma and Hospital segments, management raised guidance for the remainder of the year. The revenue growth target moved from 16.5% at the midpoint (organic) to 19%, while the adjusted operating margin target was maintained. EPS guidance was raised from $2.85 at the midpoint to $2.95, and free cash flow guidance was raised from $165M to $170M.

CSL And Haemonetics Kick The Can A Little Further Down The Road

Haemonetics and CSL announced that they had reached an agreement to extend their non-exclusive supply agreement for another two years – extending the prior end-date from December 2023 to December 2025 for an agreement that was originally going to end in mid-2022.

Management offered no real commentary on the situation, given confidentiality clauses, but it seems pretty clear that the rollout of Terumo ’s ( TRUMY ) Rika collection system isn’t progressing as quickly or smoothly as CSL initially anticipated.

While this extends an important commercial relationship, it doesn’t do a lot to improve visibility into earnings. For the prior fiscal year, CSL accounted for about 12% of Haemonetics’ revenue, and given the non-exclusive nature of the arrangement, that contribution is going to shrink as the Rika rollout progresses. A longer sunset for this relationship is better than the alternative, and it isn’t as though the Street didn’t know that business with CSL would be shrinking, but analysts and investors really don’t like uncertainty… and uncertainty is definitely in place with the CSL relationship.

In the meantime, the core plasma collections business remains strong. Excluding CSL, volumes increased 26% in the fiscal third quarter. There’s still meaningful room for growth for the company’s NexSys PCS system, and I’d note again that NexSys includes Persona – a clinically-validated plasma nomogram that customizes collections to a patient’s BMI and hematocrit and improves donor yield around 10%.

Vascade Remains An Important Driver

One of the key drivers for Haemonetics remains its efforts to diversify the business into other hospital-based businesses. Vascade, the company’s vascular closure device for interventional cardiology and electrophysiology procedures, is currently the centerpiece of that effort, with revenue up 33% year over year this quarter.

I continue to see attractive growth prospects for this product. The electrophysiology market only uses closure devices in a low-to-mid-teens percentage of eligible cases, well below the 50% or so of interventional cardiology cases, but the arguments for use – patient comfort and patient throughput – are just as valid in the EP market. Both interventional cardiology and EP are “cash register” clinics within hospitals, and it certainly serves a hospital’s interests to increase patient turnover and decrease time to discharge (which vascular closure facilitates).

I also see good underlying growth in procedure counts. With pulsed field ablation coming to U.S. cath labs in a year or so, and ongoing improvements in mapping, I believe ablation procedure counts are likely to grow, giving Haemonetics a volume+share growth opportunity. I also see growth opportunities in areas like left atrial appendage procedures ( Boston Scientific ’s ( BSX ) Watchman), as BSX believes the LAA closure market is only about 10% penetrated in the United States.

The Outlook

In the near term, my outlook for Haemonetics is basically more of the same, though I would expect to see supply chain improvements allowing for gross margin recovery and better operating leverage going forward. To that end, I see operating margins moving from the low-19%s of this quarter to about 20% in FY’24, 22% in FY’25, and 25%-plus in FY’26.

In the short term, I’m expecting around 10% revenue growth (3-year CAGR) on the strength of the plasma collections business and the ongoing growth of Vascade. I do expect growth to slow down the line, but I’m looking for high single-digit normalized revenue growth on increasing NexSys and Vascade penetration in their respective markets. I also expect management to look for additional M&A opportunities similar to Vascade – small tech-driven companies with products at or near commercialization that address share/procedure growth opportunities at existing hospital sales call points.

Haemonetics isn’t supremely cheap on discounted cash flow, but med-tech valuations are more elevated now and I don’t think a prospective high single-digit annualized return is all that bad. Using my revenue growth and EBITDA margin methodology, I believe Haemonetics is undervalued below $100 today, and I’d note that while double-digit revenue growth isn’t sustainable, these shares trade well below the multiple of many other med-techs with high single-digit to low double-digit growth outlooks (a reflection, I think, of ongoing concerns about what Haemonetics will look like post-CSL).

The Bottom Line

Given elevated valuations in the med-tech space, I do have some trepidation about recommending any name now, as a sector-wide sell-off could easily take a stock like Haemonetics with it. Even so, I think the company-specific growth drivers here are attractive and the valuation remains reasonable enough that I think it’s worth a closer look.

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