Despite A 50% Rally Haemonetics Has More Upside

We believe that Haemonetics stock (NYSE: HAE), best known for its blood and plasma supplies and services, is a good buying opportunity at the present time. HAE stock trades near $113 currently and it is, in fact, down 7% from its pre-Covid high of $122 in February 2020 – just before the coronavirus pandemic hit the world. HAE stock has rallied around 53% since its March lows of $74, slightly underperforming the broader markets, with the S&P 500 seeing 62% gains. The growth in HAE stock over the recent months is supported by better than estimated revenues and earnings posted in the recent quarters, as we discuss in the section below. Now with economies opening up, the company will likely see improved sales growth and margin expansion, driving the stock higher from here, in our view. Our conclusion is based on our comparative analysis of Haemonetics stock performance during the current financial crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/24/2020: S&P 500 recovers 62% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how HAE stock and the broader market fared during the 2007-08 crisis

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

HAE and S&P 500 Performance Over 2007-08 Financial Crisis

HAE stock moved up from levels of about $25 in September 2007 (pre-crisis peak for the markets) to levels of $32 in August 2008, and from there it dropped slightly to $27 in March 2009 (as the markets bottomed out), implying HAE stock lost just 14% from its pre-crisis highs, while it was actually up 7% between September 2007 and March 2009. It gained 3% post the 2008 crisis to levels of $28 by January 2010. In comparison, the S&P 500 Index saw a decline of 51% from its peak in September 2007 to its bottom in March 2009, followed by a sharp recovery of 48% by January 2010.

Haemonetics Fundamentals Over Recent Years Have Been Strong

Haemonetics revenues increased from $909 million in fiscal 2016 (fiscal ends in March) to $989 million in 2020, led by expansion of its plasma collection products, including NexSys. While the revenue growth rate was slow, the company has seen its Net Margins expand from -6% to 8% over the same period. This meant that its EPS grew from $(1.09) to $1.51. More recently, Haemonetics posted 17% revenue decline in Q2 fiscal 2021, primarily due to a 32% drop in Plasma revenues. This can be attributed to an overall decline in the volume of plasma disposables, due to the impact of the C0vid-19 pandemic. The company’s earnings of $0.95 per share grew 28% compared to $0.74 in prior year quarter, led by continued Net Margin expansion. It should be noted that the company is focused on improving its margins and it is currently working on two programs – Complexity Reduction Initiative and Operational Excellence Program – aimed to reduce overall costs.

Does Haemonetics Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Haemonetics total debt increased from $315 million in 2017 to $464 million at the end of Q2 2021, while its total cash increased from $140 million to $279 million over the same period. Haemonetics generated $41 million in cash from operations in the first six months of fiscal 2021. The company has enough liquidity cushion to weather the current crisis.

Conclusion

Phases of Covid-19 Crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-October 2020: After poor Q2 results, Q3 expectations were lukewarm, but continued improvement in demand, and progress with vaccine development buoyed market sentiment

As the global economy opens up and lockdowns are lifted in phases, consumer demand is expected to pick up. This could be reflected in the form of a pick-up in revenue growth toward the end of 2020, followed by revenue growth in 2021, boding well for the HAE stock in the near term. While HAE stock has 8% upside for it to recover to pre-Covid highs, we believe the stock could trend much higher than that in the near term, primarily due to continued expansion of its margins.

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