It’s said that a rising tide lifts all boats, and that axiom might apply to many of the “lesser” companies in the market for animal and pet diagnostic testing. Right now it’s pretty much IDEXX Laboratories Inc. (IDEXX, Financial) and everyone else. But some of those trailing the leader might be buoyed by their participation in a market that is forecasted to grow at a compound rate of more than 9% through 2022, reaching more than $3.6 billion, according to leading market intelligence firm Reportbuyer.
One of the reasons is that people are buying more pet health insurance. By 2017, Americans will be spending $2 billion annually to cut the amount they pay in out-of-pocket expenses for medical treatment for their pets, according to Veterinary Practice News. Another reason is the increase in worldwide demand for food produced from livestock, said Shirley Tarawali, assistant director general of the International Livestock Research Institute in an article published on the organization's website. Healthy livestock translates into greater food production. Some of the fastest growth for livestock-derived products is ocurring in developing and emerging economies, said Tarawali. At the same time, the cost of services is a growing issue, just as it is for human care.
IDEXX is head and shoulders above everyone else, according to David Westerberg, a senior vice president and senior equity analyst at C.L. King & Associates. In a recent interview published in The Wall Street Transcript, Westerberg said IDEXX is the only company pushing the boundaries of products, pointing out that nearest competitor Zoetis (ZTS, Financial)—through its recent acquisition of Abaxis - is primarily a “me-too” company. Meanwhile, Heska Corp. (HSKA, Financial) takes another approach, doing business development projects with human companies to try to build its franchise, he added.
Westerberg said IDEXX is one of those companies that consistently executes, has very high market share, is in a very defensible market and has an excellent recurring revenue stream.
The enthusiasm for IDEXX is no secret of course. The company has a lofty price-earnings ratio of nearly 60 and a market cap of more than $17 billion. At $200, however, the stock has retreated from late August, when it was up in the $250 range. At its current price, IDEXX is still well below analyst price targets of $235 on the low side and $259 on the upside.
Canaccord Genuity analyst Mark Massaro said the company has more than half of the U.S. market and had high praise for its management team, saying they have an “unbelievable grasp of the business.”
Those steering the IDEXX ship are confident the company can keep rolling along. In a Nov. 1 earnings conference call, the company said for 2019 it expects revenue of nearly $2.4 billion on a sales increase of 9.5% to 11%. Earnings per share is expected to grow from 15% to 18% to between $4.61 and $4.75 per share.
A number of other competitors selling at lower multiples might warrant investor attention. They include Zoetis, Thermo Fisher (TMO, Financial), Henry Schein (HSIC, Financial) and Sysmex (SSMXY, Financial). The Dutch company QIAGEN (QGEN, Financial) sells at an even higher premium than IDEXX.
Can these other players be expected to enjoy growth comparable to the market leaders? Not necessarily, according to Massaro, yet he thinks that “even the worst company in the space would grow six percent to eight percent annually in an industry he called spectacular.”
Disclosure: The author does not own any of the stocks mentioned in the article.
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