ABAX Abaxis, Inc. (delisted)

We reiterate our Underperform recommendation on Abaxis (ABAX) with a target price of $23.00. The company’s first quarter 2012 financial results were well below the Zacks Consensus Estimates.

Abaxis reported an EPS of 10 cents, 37.5% down from the year-ago quarter as well as the Zacks Consensus Estimate of 16 cents. The decline in EPS was partly driven by an increase in share count from 22,750,000 in year-ago quarter to 23,095,000 in the reported quarter. Effective tax rate in the quarter was 37% compared with 39% in the previous-year quarter.

Abaxis operates in a niche market of portable medical and veterinary blood analysis systems. Although low worldwide penetration provides scope for substantial growth and huge market potential for Abaxis in this niche industry, the company has been witnessing several challenges that led to continued sluggish growth in sales. During the recently reported quarter, Abaxis witnessed a huge 12% fall in international sales.

Timing issues in certain bulk order bookings through distributors were primarily responsible for the poor sales. We are also concerned about patents protecting Abaxis’ proprietary technologies that are going to expire in the next few years. Moreover, the company is witnessing delays in getting the APHIS license for its several tests, which may deter future growth.

Moreover, during the quarter, higher expenses were one of the primary challenges for Abaxis. As a result, gross and operating margins disappointed. The company’s increased legal expenses also affected its bottom line. Internationally, the company has only a few distributors for its products in both the medical and veterinary diagnostic markets, thereby leading to difficulty in establishing a steady distribution network overseas.

Moreover, Abaxis faces intense competition in the medical and veterinary market from bigger players like AlereInc. (ALR) and Idexx Laboratories Inc. (IDXX) that possess greater resources on all fronts.

 
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