“Dog is a man’s best friend.” This old saying has seen its business implications increasing these days. According to multiple studies, 98% of pet owners consider their companion animals to be full members of the family, and more than half of them admit enjoying the company of their pet even more than that of their human best friends.
That feeling of love for companion animals is often reflected on bank statements. The American Pet Products Association (referred to as “APPA”) estimates a nearly $75 billion pet economy in the U.S. Moreover, the domain has been expanding steadily thanks to the favorable demographic trend. The millennial generation continues to be the largest pet-owning customer group, and this age group is well known for paying up for quality over quantity.
To capitalize on the market's ever-increasing wish to improve the well-being of their pets, we think that no company is better positioned than IDEXX Laboratories (IDXX, Financial). The Maine-based business is the world’s leading developer of diagnostic products and services primarily for the companion animal veterinary. As of fiscal 2019, the Companion Animal Group business segment accounted for approximately 88% of the total sales and grew by 9.5% over the previous fiscal year. Geography-wise, the domestic market in the U.S. contributed to 62% of revenue, followed by the EMEA region (21%).
IDEXX employs a razor-and-blade business model, with its instruments generating small-ticket, repeatable, predictable cash streams through single-use consumables. The recurring portion now represents almost 90% (up from 80% ten years ago) of the company’s total revenue and is high-margin and low-risk. It is worth mentioning that the pet healthcare industry has a unique advantage over the human one, as veterinarians generally do not have to deal with insurance companies. As a result, providers may have higher pricing power without being forced to negotiate with payers.
With a dominant position sharing nearly half of the U.S. penetrated companion animal diagnostics market, IDEXX is trying to dig out an economic moat through its large install base and an expansive ecosystem. The management articulated the following in its annual SEC filing:
“We believe that the breadth of our full diagnostic solution, including novel products and services developed and made available only by IDEXX, as well as the seamless software integration of our offering provide a unique competitive advantage by giving veterinarians the tools and services to offer advanced veterinary medical care.”
The management also acknowledged, “Because our business lines are highly attractive, they are also highly competitive.” Major competitors include Antech Diagnostics (a unit of Mars Petcare), Zoetis (ZTS, Financial) and Heska (HSKA, Financial). According to GuruFocus, IDEXX appears to have competed favorably in terms of the annual return on assets compared with Zoetis and Heska over the past decade.
Moving forward, the company is expected to emphasize organic growth through product innovation, current market penetration and regional expansion. Per the management’s estimates, the global companion animal diagnostics market totals $33 billion, but only 11% of that has been penetrated, which paves a massive runway ahead for IDEXX and its peers.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any security mentioned in the article.
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