We recently reiterated our Neutral recommendation on MWI Veterinary Supply with a target price of $112.00.
Economic uncertainty in the U.S. and U.K. has affected both the companion animal and production animal markets with tightening credit. Moreover, volatile commodity prices of milk, grain, corn and feeder cattle and changes in weather patterns affect demand in the production animal market. Moreover, we are also concerned about the vendor dependency of the company.
Business of MWI Vet is fully based on its relationship with vendors. The company’s ability to sustain gross profit momentum is largely based on obtaining favorable terms and access to new and existing products from its vendors. As a result, any adverse change in vendor rebates could negatively impact MWI Vet’s business.
Despite all these adversities, MWI Vet posted yet another strong quarter and augmented its outlook for fiscal 2012. The company’s third quarter 2012 earnings per share (EPS) came in at $1.15, surpassing the Zacks Consensus Estimate of $1.06 and increasing 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.
The company also raised its revenue and EPS guidance to $2.05–$2.07 billion (earlier guidance was $2.0–$2.03 billion) and $4.14–$4.20 ($3.96–$4.06) respectively. This represented annualized sales growth of 31−32% (earlier expectation was 28−29%) on EPS growth of 22−24% (16−19%).
Revenues over the last 11 years have grown at a compound annual growth rate (CAGR) of 21%. Organic revenues, attributable to existing customers, represented approximately 68% of the domestic revenue growth during the reported quarter, while new customers accounted for the rest. Solid double-digit growth in both the companion animal and the production animal markets contributed to a robust 19% year-over-year increase in organic growth in this region.
The company has adopted several key initiatives to boost sales. This includes investment in technology and distribution center infrastructure in the U.S. and U.K. The company is to set up new distribution centers soon. Moreover, during the quarter, MWI Vet started emphasizing on five new sales regions. It plans to expand sales force to increase market penetration by gaining new customers.
At the end of June 2012, the company increased its field sales representatives to 308 (from 224 in the year-ago period) with 170 telesales representatives (unchanged) in the U.S. In addition, MWI Vet has been trying to focus on value-added services, including the e-commerce platform, pharmacy fulfillment programs for both production and companion animal products. We believe that these key strategies hold immense potential for the company’s future growth.
Moreover, MWI Vet is looking to preserve long-term customer relationships as well as build new ones. During the quarter, the company formed a revised distribution relationship with IDEXX Laboratories (IDXX - Analyst Report), a manufacturer of veterinary diagnostic products. Both companies entered into a non-exclusive distribution agreement, per which MWI Vet, as a business partner of IDEXX, will also be able to distribute other competitive diagnostic products.
MWI Vet expects to continue the growth momentum on the back of suitable acquisitions, sales force expansion, improvement in operating expense structure and investment in personnel, technology and distribution centers. Based on this encouraging performance, we have raised both the EPS and revenue estimate of MWI for fiscal 2012.
However, MWI Vet operates in a highly competitive veterinary distribution services market, with players like Henry Schein (HSIC - Analyst Report) and Lextron Animal Health. Presently, MWI retains a short-term Zacks #2 Rank (Buy).