It’s not often I start an article by discussing the evaluation of a stock before even writing about what they do, but in the case of IDEXX Laboratories, Inc. (NASDAQ:IDXX) I don’t think it can be avoided. It’s a company I’ve looked at from time to time and never felt comfortable with its evaluation even if its prospects are very attractive. Sufficed to say that the market doesn’t really care what I think and has taken the stock higher over the years. It currently sits on a PE of nearly 30 and an EV/EBITDA multiple of 16.3x so is it worth just walking away at this point?
IDEXX Growth Drivers
Obviously if the answer to that question was ‘yes’ I would spare you the pain of reading any further! However, I think there are some strong long term drivers here and the stock is worth watching closely. I can’t bring myself to buy at this price and I think it might take a hiccup or two to break the back of the optimism that’s around the stock but stranger things have happened.
The exciting thing about the company is its Companion Animal Group and specifically its point of care diagnostics solutions. From a company execution perspective, it is the usual razor/razor blade model of a diagnostics company. In other words, expand lower margin system sales in order to establish scale and then sell higher margin reagents into the installed base. With that said, instrument revenues were lower than it had expected them to be in Q4, but the size of accounts was described as ‘upgraded.’ Moreover, customers tend to be very loyal and have driven demand for consumables forward at a mid teens pace. Similarly, IDXX expects 11-13% growth in consumables in 2013.
In addition, there is somewhat of a shift in revenue recognition occurring thanks to its move towards a rental reagent program that typically lasts five years and ensures recurring cash flow revenues for the firm. In a sense, this program is really about tailoring a solution to the needs of the customer in order to drive consumable revenues in the future.
Idexx also has the benefit of two world class distributors in Henry Schein, Inc. (NASDAQ:HSIC) and MWI Veterinary Supply, Inc. (NASDAQ:MWIV). The latter is another highly rated company (30x earnings) and for good reason. It recently announced earnings and guidance that beat expectations. Revenues increased 24% in the quarter with operating income up 26.4%, and analysts have mid teens earnings growth penciled in for the next two years. This is a strong industry. As for Henry Schein it is more of a dental products distributor, but its Global Animal Health sales were up 19.2% in the last quarter and it gained market share. This is a good indication that it is looking to focus on this division in order to generate growth.