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MWI Vet Stays at Neutral

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We recently reiterated our Neutral recommendation on MWI Veterinary Supply with a target price of $116.00.

Economic uncertainty in the U.S. and UK has affected both the companion animal and production animal markets with tightening credit. Moreover, volatile prices of milk, grain, corn and feeder cattle along with changes in weather patterns affect demand in the production animal market. Moreover, we are 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 provided its outlook for fiscal 2013. The company’s fourth quarter 2012 earnings per share (EPS) came in at 99 cents, surpassing the Zacks Consensus Estimate of 97 cents and increasing 23.8% year over year. Revenue in the reported quarter increased 30.9% to $551 million, ahead of the estimate of $537 million.

Revenues over the last 12 years have grown at a compound annual growth rate (CAGR) of 21.9%. Organic revenues, attributable to existing customers, represented approximately 59% 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 14% year-over-year increase in organic growth in this region.On the other hand, organic revenue growth in UK during the quarter was 21% year over year, the highest in UK since the Centaur acquisition in 2010.

As a result of such a positive quarter with respect to organic growth, the company provided an encouraging fiscal 2013 revenue guidance of $2.285–$2.335 billion representing annualized growth of 10.1%−12.5%. The company also expects EPS in the range of $4.66–$4.80 with annualized growth of 10.2−13.5% in 2013.

The company has adopted several key initiatives to boost sales. This includes investment in technology and distribution center infrastructure in the U.S. and UK. Moreover, MWI Vet is emphasizing on new sales regions and plans sales force expansion to increase market penetration. In fiscal 2012, the company added 90 new sales representatives, (50 among them as a result of the acquisition of Micro Beef) and increased the number of its field sales representatives to 316 (from 224 in the year-ago period) in the U.S.

Moreover, MWI Vet is looking to preserve the long-term customer relationships as well as build new ones. During the quarter, the company formed a revised distribution relationship with IDEXX Laboratories (IDXX - Free Report) , a manufacturer of veterinary diagnostic products. Both the 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.

However, MWI Vet operates in a highly competitive veterinary distribution services market, with players like Henry Schein (HSIC - Free Report) and Lextron Animal Health. Presently, MWI Vet retains a short-term Zacks #3 Rank (Hold).

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