On Jun 24, 2013, we reaffirmed our long-term Neutral recommendation on Abaxis Inc. (ABAX). While we are optimistic about the long term potential of the company, we remain concerned about its vendor dependency and tough competitive environment. This provider of medical and veterinary blood analysis systems carries a Zacks Rank #3 (Hold).
Why the Reiteration?
On Apr 25, Abaxis reported fourth-quarter EPS of 30 cents, up 42.8% year over year. The result also beat the Zacks Consensus Estimate by 3 cents. Although revenues shot up 17% to $50 million, it missed the Zacks Consensus Estimate of $51 million.
On a geographic basis, Abaxis recorded balanced growth as revenues from the North American market (accounting for 84% of total revenue) increased 18% while sales in the overseas market climbed 10% year over year. Robust growth in international market, even amid challenging conditions in Spain and Italy, was encouraging. The company also witnessed positive momentum in the Asia-Pacific market.
We believe that Abaxis’ focus and investment in the North American and overseas infrastructure should support the current double-digit growth trend in the future. Low worldwide penetration also provides for substantial growth opportunities in the niche market served by the company.
Moreover, Abaxis’ solid growth in its mainstay veterinary market was another upside. Meanwhile, the company’s Piccolo placement remained at an encouraging level.
On the tepid side, gross margin pressure is a looming concern. In the fourth quarter, Abaxis’ gross margin contracted a massive 230 basis points (bps). We remain watchful of the increasing pressure on gross margin. We are also concerned about the company’s vendor dependency and tough competitive landscape.
The estimate revision trend also reflects bearish sentiments surrounding the stock. Following the release of the fourth-quarter results, the Zacks Consensus Estimate for fiscal 2014 declined 6.2% to $1.06 per share. Moreover, the Zacks Consensus Estimate for fiscal 2015 also decreased (down 10.2% to $1.23) significantly.
Other Stocks to Consider
While we remain on the sidelines for Abaxis, medical sector stocks such as Haemonetics Corporation (HAE), carrying a Zacks Rank #1 (Strong Buy), is likely to do well. Other medical sector stocks worth a look are Edwards Lifesciences Corporation (EW) and ResMed Inc. (RMD). Both are Zacks Rank #2 (Buy) stocks.
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