Recently, we upgraded Immucor (BLUD) to Neutral with a target price of $21.00.
Immucor had begun fiscal 2011 on a disappointing note amidst lower demand for both reagents and instruments on the back of economic uncertainty. Tighter hospital budgets and uncertainty in the healthcare market have affected orders and delayed decision-making.
Consequently, the company is projecting a 3%-4% decline in industry volume during 2011 (following a 3.5% decline in fiscal 2010) driven by lower number of elective surgeries and better blood utilization by hospitals. This, in turn, is likely to drive lower fiscal 2011 volume by 6%-7% annually. Blood associated cost is one of the largest expenses in hospital laboratories’ budgets and has been a focus for cost savings.
Although economic uncertainty has forced people to defer elective surgeries, Immucor views this situation to be short-lived because 51% of the transfusions are for cardiovascular and spinal diseases such as joint and hip replacements. As a result, industry demand would improve with the ageing population as these surgeries are typically associated with old age.
Moreover, Immucor is taking steps to revive growth of its traditional reagent business, which accounted for 59% of its revenues during the last reported quarter. However, revenues from this segment declined 9% driven by fewer ship cycles for traditional reagent red cell products and lower sales volume.
Moreover, the company lost some traditional reagents customers to competition as it was unable to provide the required service. To tide over this crisis, the company has undertaken a project to ensure proper support and service for these customers.
It is trying to improve the processes to ensure that customers receive the required support and service to optimize their performance and productivity. These initiatives are expected to have a positive impact on orders in the second half of this year. While no significant benefit is expected in fiscal 2011, these orders would boost top line in fiscal 2012.
We are also encouraged by the recent closure of an investigation by the Department of Justice (DOJ). Earlier, in April 2009, Immucor had received a subpoena from the DOJ asking for documents for a certain time period (September 1, 2000 till the date of the subpoena) related to an investigation of possible violations of the federal criminal antitrust laws in the blood reagents industry. We believe that the closing of the investigation implies that no corrective action was necessary from the findings and removes an overhang on the stock.