MWI Vet Beats with Ease in 1Q13

MWI Veterinary Supply Inc. ( MWIV - Analyst Report ) reported first-quarter fiscal 2013 EPS of $1.32, up 25.7% on a year-over-year basis. The result also surpassed the Zacks Consensus Estimate by 10.9%, representing the fifth successive quarterly earnings beat for MWI Vet.

Revenues increased 24% year over year to $572.8 million in the first quarter, which comfortably surpassed the Zacks Consensus Estimate of $532 million. The takeover of Micro Beef Technologies (on Oct 31, 2011) led to incremental revenues of $28.7 million in Oct 2012.

Organic revenue growth (barring the impact of Micro buyout) in the U.S. was 16.6% on a year-over-year basis. In the U.S., Internet sales to independent veterinary practices and producers surged 31% year over year, while the veterinary pharmacy program revenues increased roughly 23% to $52.6 million. The U.K. witnessed revenue growth of 24.2%, based on organic revenue growth of 21.7% in the region and favorable foreign exchange impact of 2.5%.

Commissions increased 16.3% year over year to $4.4 million on the back of external incentives, partially offset by a decline in gross billings from agency contracts as one of the manufacturer’s products were unavailable during the quarter.

Gross profit soared 23.1% to $76.9 million in the quarter. However, gross margin contracted 10 basis points (bps) year over year to 13.4% as improvement in freight (as a percentage of total revenue) was more than offset by lower product margin in the quarter.

Despite the absolute increase in SG&A expenses due to the addition of Micro, it declined marginally (10 bps) as a percentage of sales to 8.3% in the quarter. However, MWI Vet’s operating income climbed 26.4% to $27.1 million. As a result, operating margin expanded 10 bps to 4.7% in the reported quarter.

MWI Vet exited the quarter with cash balance of $587,000 compared with $514,000 at the end of fiscal 2012. The company generated cash from operations of $15.6 million in the quarter.

As of Dec 31, 2012, the company had $52.6 million on its credit facilities compared with $48.1 million as of Sep 30, 2012. The increase was primarily due to the acquisition of PCI Animal Health in the quarter.

Outlook

Following a strong first quarter, MWI Vet revised its guidance for fiscal 2013. The company expects to report revenues of $2.31–$2.36 billion compared with the prior outlook of $2.285–$2.335 billion. The updated outlook reflects annualized growth of 11.3% to 13.7%.

MWI Vet presently envisages EPS in the range of $4.73–$4.87 ($4.66–$4.80 earlier) with annualized growth of 11.8%−15.1% for the ongoing fiscal. The current Zacks Consensus Estimate of $4.80 is at the midpoint of the company’s guidance range.

Our View

The first-quarter performance of MWI Vet encouraged market sentiments as share price increased almost 9% (based on adjusted closing price of $125.9 on Feb 5) following the results. The bullish momentum of the stock price helped MWI Vet reach a new 52-week high of $129.35 on Feb 4. These positive events reflect the company’s strength to deliver consistent growth amid a low-growth environment.

We are optimistic about the recent acquisition of PCI Animal Health, which should seamlessly strengthen the domestic distribution network of MWI Vet. Moreover, the buyout is expected to be accretive to the company’s bottom-line for the ongoing fiscal.

The stock carries a Zacks Rank #2 (Buy). Other medical stocks such as ResMed ( RMD - Snapshot Report ) , Cyberonics ( CYBX - Analyst Report ) and Conceptus ( CPTS - Snapshot Report ) , carrying a Zacks Rank #1 (Strong Buy), are also expected to do well and warrant a look.