A Bloody Good Stock for Investors

Stocks are weird. I am not one to talk about death a whole heck of a lot. But show me a way to profit from it and I am all ears. And blood? Well, my dad is a doctor, so I guess I have a little more of a tolerance for that kind of stuff. But I would rather talk golf any day of the week. However, Fools, the possibility of profits in the health-care industry has piqued my interest.

Haemonetics (NYSE: HAE  ) is one of those companies that would probably never cross your radar unless you are looking for it. With a market cap of about $1.35 billion, it is not like the market is living and dying (sorry for the pun) by what the company does. However, this can be a good thing because Mr. Market can overlook and even misprice company actions, which is what I am counting on with Haemonetics.

Haemonetics is in the business of management; blood management, that is. The company develops and sells blood management solutions to hospitals, plasma centers, and blood banks in a necessary and growing market. Let's face it, blood is something we cannot do without. Whether you are going in to donate blood or have a surgical procedure done, there is a good chance that Haemonetics may be involved in one way or another.

And the company's business model is what has kept me interested. Haemonetics' solutions come in the form of a razor- and-blade-style model, which the company is continuing to enhance as technology allows. It sells equipment to hospitals and blood banks (the razor), then realizes recurring sales of the single-use consumable devices that go with the equipment (the blades). To top it off, it offers the software solutions to manage the whole process. Below is the breakdown of net revenues for the past two years:

                                Source: Company filings.

As you see, most of the company's revenue comes from the disposables side of the business: one-time use, proprietary consumables that donor centers or hospitals have to keep in stock. I love this part of the business, and I'm also excited about the equipment segment, where Haemonetics is getting more and more of its blood salvage systems like the CellSaver, CardioPAT, and OrthoPAT into hospitals. Blood salvage is a process whereby the patient's blood, specifically red blood cells, lost during and after surgery is cleaned and prepped for transfusion back into the patient. This is a growing alternative to traditional methods where patients normally depend on blood donors, and hospitals don't have to delay surgery because of a blood shortage. I mean, hey, who doesn't want their own blood? 

And lest you think it's stopping there, Haemonetics has licensed and is developing a laser blood typing system that management estimates could be an additional $1 billion market opportunity.

Technology like this doesn't come cheap, and Haemonetics' stock continues to outperform the market pretty soundly, as the five-year chart below shows:

The fact is that health-care-related stocks tend to do well, especially in tougher economic times, because they are not so discretionary. Haemonetics is no exception, and I expect it will continue to outperform. While it is trading at about 18 times free cash flow, I think we can get it cheaper in this crazy market and I am going to keep a very close eye on this one.

In Haemonetics, you have a growing company with cool technology in a permanent line of work (we'll always need blood) -- qualities I love to see in a business. The way I see it, the population is continuing to grow, and you can't stop Father Time. A growing and aging population is good for Haemonetics because it should keep boosting demand for its products. Stryker (NYSE: SYK  ) will supply this aging population with orthopedic implants such as knee and hip replacements, and Medtronic (NYSE: MDT  ) will take care of it with stents and pacemakers. All of these require surgery, and this is where Haemonetics' products will shine because its competitive advantage lies in its size and laser-like focus on one particular thing: blood.

I suggest you do as I do and keep this one on your watch list.