HAE - Haemonetics: Solid Performance Of This Blood Play

2023-11-22 06:15:07 ET

Summary

• Haemonetics has seen signs of growth and operational momentum after a challenging period during the pandemic.
• The company's fiscal year 2024 first half results were solid, increasing its appeal.
• Still trading at a small premium based on adjusted earnings, valuations remain somewhat demanding despite arguably a solid operating performance year to date.

In May, I called Haemonetics ( HAE ) a premium blood play which was showing signs of operational momentum again. After a painful 2021, Haemonetics has seen some signs of growth again, although premium valuations made me cautious on the risk-reward prospects here.

The company has just seen another solid first half of its fiscal year 2024 which together with a stagnant share price has increased appeal quite a bit, making the situation look a lot more compelling, just not enough yet in order to get involved here.

Haemonetics - About Blood

Pre-pandemic Haemonetics was a near billion business with revenues generated across three segments. The largest segment was the plasma business, responsible for nearly half of sales, generated from disposables, collection devices and donor management software.

This business line was complemented by a blood center segment, which is actually hurt by the continued advancements in science and surgical performance. This comes as blood transfusion activities are hurt by the continued rise in minimally invasive surgery procedures and better blood management. These two segments were complemented by a blood management business which delivers directly to hospitals.

For the fiscal year 2020 (which ended in March of the year), the company reported a 2% increase in sales to $988 million on which adjusted earnings of $171 million, equal to $3.31 per share, were reported. GAAP earnings came in at just half those levels, and while the adjustments looked fair in isolation, I have noted that the business often sees adjustments, and they involve cash outflows at times as well, making me cautious to blindly use the adjusted earnings numbers.

Following a $475 million deal for Cardiva, I believed that the business could post earnings around $4 per share in a post-pandemic world, yet I was cautious to underwrite a big premium applied to the business, on the back of the potential of its NexSys system to become the standard in plasma collection.

In May 2022, the company posted its 2022 results with revenues recovering 14% to $993 million after the 2021 results were impacted by the pandemic, although much of the growth was driven by the Cardiva deal. Adjusted earnings rose modestly, reported up twenty-three cents to $2.58 per share, as GAAP earnings fell below the dollar mark with net debt posted in excess of a half a billion.

Forwarding to May of this year, Haemonetics reported an 18% increase in full year sales to $1.17 billion for the fiscal year 2023, with adjusted earnings of $3.03 per share showing a solid improvement as well, although still coming in softer than pre-pandemic levels.

The company guided for 2024 sales to increase some 4-7%, yet earnings were expected to show a more pronounced improvement, seen between $3.45 and $3.75 per share, although it still lagged my earlier hopes for earnings power of $4 per share in a post-pandemic world.

With shares trading at $90 per share, multiples had come down to about 25 times adjusted earnings. This was still a big premium, something which I could not explain, even as leverage came down to less than 2 times, as in fact I required shares to fall to the $60s or $70s before potentially getting involved.

Expectations Come Down

Since May, shares of Haemonetics have traded in an $80-$90 range, trading at $83 which marks modest declines from levels seen in May. In June, Haemonetics received FDA clearance for enhancements to its NexSys Plasma Collection System, with features designed to reduce donor time while boosting yields.

In August, Haemonetics reported a decent 19% increase in first quarter sales to $311 million as operating earnings improved by three quarters to nearly $54 million, with GAAP earnings posted at $0.80 per share and adjusted earnings reported at $1.05 per share, essentially doubling from the year before. On the back of the strong quarter, the company hiked the full year sales guidance by two points to 6-9%.

In October, the company announced a $253 million acquisition of Canadian-based OpSens, a medical device cardiology focused company which delivers innovative solutions based on its optical technology. The company guided for accretion to reported revenue growth, although a slightly dilutive impact to 2024 earnings was seen. With just over a 5 times sales multiple paid, this deal is strategic and comes in at just over 4 times sales, a multiple at which the own business trades.

Second quarter results, as released in November, showed a 7% increase in sales to $318 million, as slower growth and higher expenses weighed on the margin progress. Adjusted earnings advanced sixteen cents to $0.99 per share and were down six cents on a sequential basis. Moreover, no less than 8 adjustments were made to the earnings, and while the business post earnings on track for $4 per share, I am not happy to accept all these adjustments.

Net debt has come down to $411 million, but this is ahead of the OpSens deal of course as pro forma net debt of around $660 million is still resulting in leverage level just over 2 times EBITDA, manageable ratios. Note that some of the momentum is set to revert, even as the company hiked the full year guidance in a minimal fashion, with adjusted earnings seen at a midpoint of $3.80 per share, but this came after earnings totaled $2.05 per share in the first half of the year already.

With shares down a bit, a 25 times earnings multiple in May has come down to 21–22 times earnings, even as momentum is stronger than expected at the outset of this year, but the deal with OpSens will create some moving parts as well.

And Now?

The truth is that Haemonetics is doing quite well in what is a tough year for any medical device manufacturer, or biopharmaceutical company which is not involved with the development and/or sale of G1P drugs.

The company is seeing solid momentum however post-pandemic as not all can be attributed to a reversal of the plasma business post the pandemic, but some real underlying strength is seen as well, as adjusted earnings by now are finally coming in at $4 per share.

Given all these developments, I am turning more upbeat on the business amidst continued growth and share price stagnation, from a high valuation from the get-go, but the issue is that earnings remain adjusted and it still trades at a small premium here. Given this, I am turning more upbeat on Haemonetics stock than I did this spring, but require shares to fall to the low-seventies before reconsidering my current neutral stance.

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