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By Mick Wells
Los Angeles based VCA Antech is a juggernaut in the North American animal health sector.
The company owns and operates about 600 veterinary practices (563 in the US and 46 in Canada), the much famed, competitive and profitable Antech Diagnostics, med-tech & imaging services from Sound-Eklin, veterinary & consumer marketing company and data provider to vet-pharma VetStreet, as well as the largest network of veterinary specialty and referral providers.
For a pure-play animal health organization, the company is as diversified as you will find.
The company has its roots in the once fragmented, but highly profitable, diagnostics market and acquired its first hospital about 25 years ago. Since that time hospital revenues have eclipsed diagnostics revenues about 4:1, but the income contributions are less drastically distorted ($155m from hospitals in 2012, $116m from Antech.)
The challenges that VCA Antech face are representative of the industry in which they operate. Veterinary practice revenues are impacted by the state of the economy, margins are difficult to manage, there are not many levers that you can pull to make changes to your operating income. On the diagnostics side, despite the high margins (hovering between the low 40′s and mid 30′s) the market dynamics have intensified.
Idexx, Abaxis, and Heska are well led competitive & aggressive diagnostics companies and have established footprints, too. And the FTC just finalized a consent agreement with Idexx that opens up the market for more access to the staid distribution network in animal health. These practices in animal health have been all too common, but are starting to sort out. What this ultimately means for the Antech business is a shrinking operating margin – and when your income from the diagnostics market is that high as a percentage of total income, that’s troubling.
VCA Antech’s top-line performance over the last 5-years has been impressive, however the operating margin has been a struggle. Today they announced an impressive increase in operating income (+11%) but their margin dropped nearly two points from 14.6% to 12.9%. But the company can maintain its operating income without drastic changes how they’ve always done it, thru acquisitions: hospitals, bolt-on service or supply companies, etc. And they have been the most persistent buyer. As long as new revenue sources can be found they can hit their operating income guidance, and it’s worked for them so far.
And, it is in that vein that VCA Antech received good news from the capital investment community over the last several days. The following investors were issued greater than 5% shares of WOOF stock:
- Black Rock 6.7%
- Veritas Asset Management (UK) Limited 10.5%
- Shapiro Capital Management 8.6%
- The Vanguard Group 5.2%
- Capital Research Global Investors 5.6%
Back-of-the-envelope that looks to be north of $600m if you consider a $20 stock quote. So, for a company that averaged $100m in hospital acquisitions over the last 5 years – and has given guidance for about $50m this year – what’s to be done with that surplus of cash? Maybe we’ll see VCA Antech use those funds to buy back some of their common stock; that will certainly make the analyst community happy!
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