(ABAX) Abaxis Analyst Upgrades Shares to Neutral

Following the company’s solid second quarter 2011 results, which were ahead of the Zacks Consensus Estimates, we have upgraded our recommendation on Abaxis (ABAX) to Neutral with a target price of $26.00.

The company reported EPS of 15 cents in the quarter, surpassing the Zacks Consensus Estimate by 2 cents. On the other hand, net sales increased 13% year over year to $40 million and beat the Zacks Consensus Estimate of $38 million.

The year-over-year growth was based on higher sales in both North America (up 8% to $31.9 million) and in the international market (up 39.9% to $8.0 million). The overall balanced revenue growth in both North America and in the international market was encouraging, especially amid a tough global macro-economic environment.

Abaxis is executing well in its veterinary division with an expanded product line and a growing direct sales force.The company intends to introduce new rapid assay of products, which would boost the veterinary revenue. In addition, during the quarter, the company earned robust revenues in its VetScan Rapid Test line (up 46% year over year to $2.1 million).

This apart, the recent launch of full-service laboratory testing facility, Abaxis Veterinary Reference Laboratories (AVRL) is expected to compliment the company’s veterinary sector’s growth going ahead.

Moreover, the company witnessed a consistent increase in Piccolo placement. During the quarter, total revenue from the medical market increased by 7%, with an 8% rise in total sales of Piccolo chemistry analyzers and medical reagent discs in North America (excluding the US government) primarily due to higher sales volume of Piccolo chemistry analyzers to distributors resulting from higher sales to end users.

In addition, total sales of Piccolo chemistry analyzers and medical reagent discs to the US government jumped by 33% during the quarter. With the various core-marketing programs undertaken, Abaxis expects the placement rate to increase further. In such a scenario, our recommendation could go wrong.

Although gross and operating margins continue to disappoint based on several challenges,we are encouraged by the 160 basis points sequential rise in gross margin, which reflects the company’s successful control over expense structure and focus on further reducing disc cost.

However, we remain apprehensive based on Abaxis’ dependency on distributors to sell its products and its increased legal expenses. Besides, the presence of many big players like Alere Inc. (ALR) and Idexx Laboratories Inc. (IDXX) that are endowed with greater resources on all fronts has made the human and veterinary diagnostic market highly competitive.

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