This is slightly unusual territory for me because healthcare is one of my preferred sectors going into 2009, due to its high barriers to entry, predictable earnings and attractive valuations. So why am I bearish on Axis-Shield, a provider of test kits for diagnosing patients with diabetes and cholesterol? Well, in a nutshell, the share price simply looks too racy for my more value-based appetite.
Axis-Shield (LSE:ASD), rated as a BUY by Piper Jaffray
The global market for diagnostics testing is worth $35bn a year and is expanding at around a 7% clip, with the main protagonists being Siemens, Roche and Abbot Laboratories. Irrespective of the recession, the industry's growth rate is expected to continue, since this type of science helps detect the early symptoms for many critical illnesses. This not only improves survival rates but also decreases treatment costs, an important factor as hospitals shift more resources from reactive to preventative medicine. What's more, the bulk of Axis' revenues come from selling test cartridges for the machines that are installed in doctor's surgeries, hence providing good visibility of future income.
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Meanwhile its new flagship diabetes system Afinion is also creating a stir with physicians. The company expects to have an installed base of around 4,000 systems by the end of the year. Afinion is faster than the comparable technology from Siemens, which has 20,000 machines in use. Another differentiator is that Axis's hardware can conduct multiple tests, including those for reactive proteins important when deciding whether antibiotics should be prescribed.
But even so, overpaying for a stock, even a quality franchise like Axis, is a recipe for wealth destruction. On the numbers, the City is predicting 2008 sales and underlying EPS of £84.1m and 7.24p respectively, rising to £96.7m and 15.9p in 2009. That puts the shares on corresponding p/e multiples of 42 and 19.
Moreover, I suspect that given the more frugal times ahead some thrifty doctors may delay installing Axis's innovative machines, in turn possibly triggering a profits warning. Lastly, with this type of science improving all the time, it wouldn't be too surprising if one of the company's bigger rivals introduced more advanced equipment at some point.
All in all, I would value Axis at nearer 14 times 2009 earnings, or around 220p a share, representing a potential decline of 25% from current levels.
Admittedly, Axis could always be taken-over, but at these rarified prices the balance of risk must weigh on the downside. Watch out for the next trading update, scheduled for Wednesday 7 January.
Recommendation: TAKEPROFITS at 305p (market cap £150m)
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.
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