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This Company's "Dismal" Performance Masks Excellent Opportunity

John Leonard
February 14, 2014

Abaxis (NASDAQ: ABAX) fell sharply after reporting disappointing results last month. However the recent recovery suggests the market is beginning to realize that the cause for the "dismal" results (the CEO's words)  is most likely a one-off occurrence rather than the start of a trend.

ABAX Chart

ABAX data by YCharts

Abaxis supplies point of care blood analyzers to the medical and veterinary markets, where the demand is fairly inelastic. Moreover, its compact yet complete system can be operated with minimal training and perform multiple types of tests, as well as provide results in minutes with clinical laboratory accuracy .

In the quarter ended in December, revenue decreased 18% primarily due to lower sales in the core veterinary market segment (79% of revenue ) as a result of excess inventory in the distribution channel, an unfavorable comparison from two large stocking orders in the prior period, and transition of its medical sales to partner Abbott.

The news wasn't all negative as international sales increased 13% in the quarter ended in December  and operating cash flow increased 4% in the nine months ended in December, . The latter continued the trend of consistent free cash flow growth shown in the chart below. Moreover, the balance sheet remains strong as cash and investments increased by $17.1 million to $112.4 million while there is less than $1 million of debt .

Source: SEC filings, in millions

The steady top and bottom line growth shown in the chart below should rebound for the following three reasons.

Source: SEC filings, in millions

First, management said that the inventory problem should be resolved within two quarters when it expects increased purchases from its veterinary distribution partners due to higher demand .

Second, the previously mentioned new distribution agreement drove a 30% decrease in sales and marketing expenses (which only accounted for 21% of revenue compared to 25% in the prior period ), as this allowed Abaxis to substantially reduce its U.S. medical sales force. Moreover, the planned sales force expansion by Abbott should drive additional revenue growth .

Third, profitability should increase for a number of reasons. For example, next February minimum royalty payments for one of its tests go away, which should lower costs. While an attempt to improve manufacturing efficiencies backfired by actually raising costs, management corrected this problem so costs should come back down .

Shareholder-friendly management
The history of buybacks and special dividends should encourage shareholders during this transition period. In the nine months ended in December, Abaxis repurchased $3 million of stock after the board approved a $12.3 million buyback increas