Animal Health International (AHII)

Animal Health International reported lower-than-expected fourth-quarter net income of $2.7M, or EPS of $0.11. Nonetheless, EBITDA increased 27.2% year-over-year after adjusting for a one-time charge in the comparable quarter last year, and was driven primarily by an increase in sales volume.

We are encouraged by the expansion of gross profit margins and continue to believe the company is well positioned to take advantage of currently challenging economic conditions to grow its production animal business via acquisition. We retain our Buy recommendation at current levels.

With a significant number of products expected to lose patent protection over the next several years, we believe the company is well positioned to enhance margin expansion through the incremental addition of private label products to the product mix. We have valued AHII on a forward price/earnings basis, as well as a comparison to similar firms in the animal health products sector. Our $9 price target represents a 13.9 times fiscal 2009 EPS of $0.65.