With vampire movies all the rage now, let’s take a quick look at Immucor Inc. (BLUD), one of my recommended stocks that specializes in blood testing. Immucor has done very well so far this month, with BLUD stock rising on higher than normal volume.
Each year, 5 million American require donated blood to survive accidents and undergo various surgeries. Few will think about where the blood came from, or the history of the process.
The quick version goes like this: Blood banks were invented in the early 1900s and have played a key role increasing life expectancy to age 78. A key step was the invention of a citrate-glucose solution that helped preserve blood for several days, leading to the first ”blood depot” during World War I. In the second world war, a Philadelphia-based surgeon figured out how to save victims of the Pearl Harbor attack with new technique involving albumin injections. In 1947, the American Assn. of Blood Banks established donation standards, but testing for blood impurities did not begin until 1971.
Despite all the advances of the past century, blood testing methods have not changed much in this time. About 70% of tests are performed by highly trained, and thus expensive, technicians who unfortunately make mistakes.
That is where Immucor comes in. The company sells machines that automate the blood-testing process, eliminating the ambiguity associated with interpretation. BLUD’s machines standardize procedures using proprietary chemicals that rapidly identify impurities. Results are immediately entered into a database, reducing technician error and improving patient safety.
Based in Norcross, Georgia, the firm has played a vital role in making blood transfusions safe since 1982. In 1998, BLUD began revolutionizing the blood bank industry with the introduction of the first fully automated blood screening machine, which it called the ABS2000.
BLUD’s second generation machine, called Galileo, is a high-volume instrument targeted at large hospitals. This is the box that lifted the medical device-maker out of obscurity. You can see that its introduction in 2002 in Europe launched the firm higher after a dozen years of desultory trading. When it received approval in the United States in 2004, the company’s sales and shares really took off.
In 2007, Immucor launched its Echo line, expanding its customer base to include small and medium-sized hospitals — and further pushing up the stock price. In 2010, the company posted $326 million in annual sales and rose to enjoy a $1.3 billion market cap.
The Galileo Neo is BLUD’s the newest generation of transfusion technology: It includes an easy-to-read digital screen and 20-vial capacity that allows it to test more vials per hour than competitors’ products. The Neo has already been introduced in Europe and Japan and is awaiting FDA approval before entering the U.S. market. If it passes scrutiny, analysts believe it could provide another boost to sales and the shares.
In August 2008, Immucor purchased BioArray Solutions, a small company that chief executive Dr. Gioacchino De Chirico believes will be the future of the blood transfusion industry and could potentially saves millions of lives. BioArray focuses on DNA typing that permits quicker and more detailed compatibility testing. This product will allow many countries, which only perform basic tests, to cheaply screen for a much greater variety of diseases.
The company benefits from a lock-in effect. Its instruments are closed systems that can only operate on BLUD’s proprietary chemicals. Just as Hewlett Packard sells ink for the printer that you already own, BLUD generates a recurring revenue stream by resupplying its machines with the chemicals that make them work. That establishes a long-term relationship with customers, giving the company steady cash flow.
Despite its success since 2002, BLUD is a still a small-cap stock with lots of growth ahead, considering earnings five-year earnings growth is more than 30% and return on capital is better than 20%. Since only a third of blood tests are currently automated, the potential market for its products is still large.
BLUD shares are relatively cheap, trading at a price/earnings multiple of 17x, vs. 23x for several rivals even though its 39% operating margins are superior. My price target for the next year is $26.50, which would offer 32% upside from the current price at $20. Keep holding.