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MWI Veterinary Supply’s (MWIV - Analyst Report) third quarter 2012 EPS came in at $1.15, surpassing the Zacks Consensus Estimate of $1.06 and increased 26.4% year over year. The company reported a robust 35% increase in revenues to $554.7 million and comfortably surpassed the Zacks Consensus Estimate of $514 million. 

Excluding the acquisition of Micro Beef Technologies (acquired on October 31 2011), the company's organic revenue grew 18.5% in the U.S. Revenues from Micro Beef acquisition were $69.1 million for the quarter, flat sequentially. In the UK, revenue increased 16.7% year over year, including 20.2% organic growth, partially offset by a 3.5% decline related to foreign exchange.

Commissions plunged 29.6% year over year at $4.6 million, negatively impacted by the loss of a pet food line in fiscal 2012 along with a shift in commission terms for some parasiticides. Moreover, commission was high in the year-ago quarter, as the company earned a commission incentive from one of its vendors.

In the reported quarter, Internet sales to independent veterinary practices and producers in the US rose 33% year over year. Veterinary pharmacy programs revenues increased roughly 34% to $46.0 million.

Gross profit increased 28.5% to $69.5 million during the quarter. However, gross margin contracted 70 basis points (bps) year over year to 12.5%. The decline was due to lower product margins and decrease in commissions partially offset by improved freight as a percentage of total revenue.

In the reported quarter, MWI Vet’s operating income increased 24.5% to $23.4 million. However, with a 30.6% rise in selling, general and administrative (SG&A) expenses to $44.0 million, operating margin dipped 36 bps to 4.61% during the quarter.

The huge increase in SG&A expenses was based on the addition of Micro Beef and the added support for the company’s revenue growth. However, SG&A expenses, as a percentage of sales, dropped 30 bps to 7.9% during the reported quarter.

MWIV exited the quarter with cash balance of $434,000 compared with $606,000 at the end of fiscal 2011. On June 30, 2012, the company had $56.2 million on its credit facilities compared with $53.3 million at the end of September 30, 2011. The increase in outstanding on credit facility was primarily the result of the acquisition of Micro Beef assets.

Outlook

MWIV raised its guidance for fiscal 2012. The company expects to report revenues of $2.05–$2.065 billion (earlier guidance was $2.0–$2.025 billion), representing annualized growth of 31−32% (28−29%).

The company also expects EPS to be in the range of $4.14– $4.20 ($3.96– $4.06) with annualized growth of 22−24% (16−19%) in 2012. The company’s guidance is higher than the current Zacks Consensus estimates for revenue and EPS of $2.033 billion and $4.07, respectively.

Our Take

We are encouraged with MWI Vet’s better-than-expected third quarter result, guidance revision with the growth momentum maintained by the company over the past few years.

The company, which is one of the leading distributors of animal health products to veterinarians across the US, has acquired many companies to either expand its presence in areas where it has low market share or for increasing its focus in new areas.

The company has witnessed substantial market share gain amid a low-growth environment. However, the company faces stiff competition from key player like Henry Schein (HSIC - Analyst Report), among others.

Presently, MWI Vet retains a short-term Zacks #2 Rank (Buy). However, over the long term, we have a Neutral recommendation on the stock.

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