Good Flow for BLUD Shares
A number of positive trends and developments make us optimistic about blood-testing products maker Immucor, Inc.'s (BLUD) growth. Gross margins are expected to regain momentum from the eventual growth in reagent sales, manufacturing efficiencies, and price increases.
The additional worldwide placements of Galileo (a walk-away instrument that can process up to 224 different samples at one time), the launch of a third-generation Galileo called Echo and the development of another version of Galileo work in favor of Immucor. Despite being dilutive during development of the technology, the pending acquisition of BioArray Solutions can transform Immucor into a leader in molecular diagnostic systems for blood transfusions.
At its current price of $26.23 per share, BLUD is trading at roughly 28x our fiscal 2009 earnings estimate of $0.95 per share, which is roughly in-line to the group multiple. Although continuing to grow, revenue may fall below expectations due to lower than anticipated sales from the customer loyalty program and Europe. In addition to revenue growth, gross margin expansion and operating cost control have been driving earnings higher.
We expect some downward pressure on the stock from the U.S. Federal Trade Commission inquiry announced in the second quarter. We believe the stock is fairly valued at roughly 34x fiscal 2009 EPS estimate. Our target price remains at $32.
UST Fighting Discount Competition
UST Inc. (UST) has been steadily losing market share to discounters in the sub-premium categories over the last 15 years. The last seven quarters have seen a return of positive growth in premium moist smokeless can sales as a result of Project Momentum. However, margins are declining as the company looks to the lower-margin wine business for top-line growth. Hence, the rating is a Hold.
The primary investment thesis is that UST is a leading brand product company that exhibits consistent single-digit volume growth. As the industry leader, the management is able to enhance brand awareness and regularly raise prices, leading to 5 percent to 7 percent annual EPS growth over the long term, along with substantial cash flow generation for share repurchases and dividends. After losing market share for over a decade, the management is now focused on combating the discount competition and growing the entire smokeless tobacco category.
Like other tobacco companies, UST faces health-related litigation risk. Though UST's risk profile is lower than that of the major cigarette companies, there is a perception that smokeless tobacco is as dangerous as cigarettes, especially as a potential cause of oral and pancreatic cancer. Currently there are several smokeless tobacco litigation cases pending in the courts. The company's debt level and interest expense are also on the rise.
UST's stock has traded in a P/E multiple range of 7 to 18 over the last five years. We expect the stock to trade in a P/E multiple range of 13 to 18. The target price of $57 is 16 times 12-month trailing earnings.
Gradual Growth for Avanex Corp.
Avanex Corporation (AVNX) is a leading provider of optical communication solutions. The company posted Q3:FY08 results with strong gross margin performance and sales modestly above expectations leading to a pro forma EPS beat.
Avanex also reported one of its highest design win quarters ever, led by transmission products, and pointed to normalizing market order trends with visibility remaining limited.
