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Heska Corporation: Strong Balance Sheet and Dividend Yield Do Not Compensate for Difficult Business
Posted by: Mark Lin (IP Logged)
Date: December 13, 2012 09:24AM


Heska Corporation (HSKA) sells advanced veterinary diagnostic and other specialty veterinary products. HSKA's state-of-the-art offerings to its customers include diagnostic instruments and supplies as well as single use, point-of-care tests, pharmaceuticals and vaccines. Its core focus is on the canine and feline markets where it strives to provide high value products and unparalleled customer support to veterinarians.

Its Core Companion Animal Health segment accounted for 84% of HSKA's fiscal 2012 revenues and includes diagnostic and other instruments and supplies as well as single use diagnostic and other tests, pharmaceuticals and vaccines, primarily for canine and feline use.

Valuation

HSKA currently trades at a trailing 12 months P/E of 35.14 and a trailing 12 months EV/EBITDA of 11.08. Its current P/B valuation at 0.93 represents a 4% premium to its five-year average P/B of 0.89. HSKA achieved a 2.7% ROE for the past 12 months and 2011 ROE of 4.5%. Management attributed the fall in ROE to higher operating expenses in the form of increased sales force personnel.

Financial and Business Risks

HSKA is debt-free with net cash of $5.7 million representing 13% of its current market capitalization of $45 million.

HKSA may find it increasingly difficult to compete in the industry. According to management, one of its largest competitors, IDEXX, prohibits all of its distributors from selling competitive products, including HSKA's diagnostic instruments and heartworm diagnostic tests. Another of its competitors, Abaxis, recently launched a veterinary diagnostic laboratory offering.

HSKA's continued success is dependent on product development, commercialization and/or market acceptance. For example, its VitalPath Blood Gas and Electrolyte Analyzer generated less revenue than expecected following its launch in May 2010 as placements of this product with customers fell short of its target.

HKSA has had a patchy financial track record. It has only achieved two quarters with income before income taxes greater than $1.5 million thus far. Since its inception in 1988 and prior to 2005, HSKA incurred net losses on an annual basis and has retained losses amounting to $170.4 million as at Sep. 30, 2012.

Business Quality and Capital Allocation

HSKA operates in a growing market. The U.S. Companion Animal Industry generates approximately $50 billion in annual sales, with over $3.5 billion spent in HSKA's target market. HSKA also boosts of a superior and growing product portfolio, by virtue of its relationships with FUJIFILM Corporation and Roche Diagnostics GmbH LLC.

HSKA initiated dividends in 2012 with a quarterly dividend of $0.10 per share. It currently sports an annualized dividend yield of 4.9%.

Disclosure

The author does not have a position in any of the stocks mentioned.


Stocks Discussed: HSKA,
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