“Dog is a man’s best friend” is more than a playful expression.
According to a survey conducted by Mercure Hotels, a dog-friendly lodging company, more than half (53%) of dog and companion pet owners admit they enjoy the company of their pet more than that of their human best friends.
Our love for companion animals shows up in our bank statements. U.S. pet owners are expected to spend a record $75 billion on their pets this year, including $19 billion on veterinary care, according to a study by the American Pet Products Association.
In other words, like family members, our pets are non-negotiable. Consider spending for a dog or cat a fixed monthly bill, like you would rent or a mortgage. Pet owners willingly eat ludicrous costs for great pet care even if they’re in the midst of financial hardships.
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IDEXX Laboratories, a diversified pet health care company and the industry leader in diagnostics for companion animals, is arguably better positioned than anyone to capitalize on those of us who make Instagram accounts for our pets.
IDEXX sells the tabletop diagnostic machines to vets for a one-time fee, then sells the testing kits on a per-use basis (think “razor-and-blade” model).
One of the company’s most popular products, Catalyst One, screens blood samples from dogs and cats for up to 33 diseases in as little as eight minutes. It’s a time saver for vets and, potentially, a lifesaver for pets.
The company boosted its earnings per share (EPS) to $1.24 for the third quarter of the 2019 fiscal year, a 21% year-over-year increase when accounting for foreign currency movements. Revenue climbed 12% on an organic basis from the previous year.
IDEXX’s growth has consistently outpaced that of the pet care industry. There’s plenty more to like about this health care juggernaut.
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Strong competitive positioning
A “moat” – or a company’s ability to maintain competitive advantages and safeguard its long-term profits and market share – matters more than the near-term flow of news, a company’s growth outlook, and any of the other factors that jostle a company’s daily stock price. It’s perhaps the single most important determinant of future profits.
IDEXX isn’t coasting on the moat it’s dug out. It’s working to widen it with aggressive research and development efforts. The company estimates that its research budget represents a staggering 80% of all global R&D that goes into companion animal diagnostics.
It’s paying off. IDEXX’s equipment and software are state-of-the art. The VetConnect Plus service sends results from a blood or urinalysis test straight to a vet’s mobile phone as soon as they’re ready, shortening the agonizing time frame between the test and result for pet owners.
Pet owners aren’t the only ones who appreciate the commitment to improved care. According to the Brakke Veterinary Technical Services Survey, respondents say IDEXX offers the best overall technical service to its customers, placing it above competitors in the animal health space, including Zoetis and Heska. Veterinarians said they were more likely to recommend IDEXX’s products than those of any other pet diagnostic company.
When it comes to point-of-care (POC) diagnostic instruments, the company claims up to a 99% customer retention rate. It’s this type of loyalty IDEXX has established with both vet practices and animal lovers that seems to further solidify its dominant market position. The company’s been so effective at wrestling away market share it’s been called out for exercising monopoly power.
In 2010, the Federal Trade Commission flagged IDEXX for unfair trade practices, claiming the company shut out its competitors by locking in exclusive distribution agreements. IDEXX agreed to a settlement that prohibited concurrent exclusive distribution arrangements with three national distributors of POC diagnostic testing products. Some analysts expected IDEXX to lose substantial market share.
That didn’t happen. Since the settlement, the stock’s jumped more than 450%.
IDEXX is still the global leader in its industry, with about 60% of the market share for veterinary diagnostics tests and instruments. Zoetis holds the second-place spot with about 30% share, and Heska carries no more than 9% of the market.
Growth? Check. Moat? Check … Value?
When assessing the value of a company such as IDEXX, sometimes a quick glance at a few valuation metrics can be a bit misleading, especially if investor enthusiasm is at or near an all-time high.
That’s why we dig a little deeper.
The company’s 53.90 price-to-earnings ratio is markedly higher than the “medical-instruments” industry average P/E of 31.06. So yes, on paper, based on this single metric, the stock is overvalued.
Is IDEXX an exceptional company at a bad price?
Given its strong earnings history of 16% per year over the past decade, what it really means is shareholders believe IDEXX will continue to outperform the companies in its industry.
If there’s a cause for concern, it’s the company’s net debt position. It’s generally better to seek out companies that hold net cash positions, which they’re expanding, so they can use that cash to reinvest in their business and increase margins and profitability – and ultimately shareholder value.
A closer look at IDEXX reveals the company’s maintained a strong balance sheet with leverage ratios as a multiple of adjusted EBITDA of 1.39 times gross and 1.24 times net of cash at the end of the quarter.
We don’t know when the company will move from responsible debt management to, well, debt-free (the company’s long-term debt of $760 million has grown more than 25% since the end of 2018). But here’s what we know: Pets are an integral part of the American family, and IDEXX’s innovative spirit, in tandem with its core market dominance, make this industry leader a smart addition to any growth-oriented portfolio.
With new CEO Jonathan Mazelsky in tow, this top dog’s got ample runway ahead, domestically and overseas. Get a piece of this company, because if you’ve got a pet in the house, chances are, sooner or later, it’ll get a piece of you.
Jared McKiernan owns shares of Idexx Laboratories. The Motley Fool owns shares of and recommends Idexx Laboratories. The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
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