IDEXX Laboratories: Strong Animal Diagnostics Play With Full Valuation

IDEXX Laboratories: Strong Animal Diagnostics Play With Full Valuation

Investment Thesis

IDEXX Laboratories (NASDAQ:IDXX) was founded in 1983 and develops a variety of products/services focused on the companion animal and livestock market. These products consist largely of veterinary diagnostic instruments and associated consumables largely in the US (~60% of the revenue mix). Overlaying this diagnostic hardware is a software-based solution called VetConnect Plus which allows vets to access and analyze diagnostic data.

To give a sense of the split between the company’s CAG (Companion Animal), Water, and (LPD – Livestock) segments, see the below breakdown from their 2019 10-K. Most of the business is really companion animal and is also the segment that is growing the fastest.

To just briefly go over the company’s product companion animal portfolio in a bit more depth, the company goes to market with a series of blood/urine analyzers, immunoassays, and single-use tests largely focused on the canine/feline market. The company also sells software such as practice management, EHR, and client engagement software focused on vets.

Just given the Vet end-market, there are definitely COVID-19 related impacts here that may return if we enter a second shutdown. So there is a definite clear risk here. But even through COVID-19, there was a certain amount of resiliency with visits only dipping 30% at the lowest point in April when COVID-19 related headwinds were most strongly felt.

Overall, the company has performed well even through COVID-19 and historically as well as seen below as investors looked past the near-term headwinds and towards the long-term potential of the company.

ChartData by YCharts

At the end of the day, whether you are selling instruments or associated consumables (the company does both), you are ultimately levered to volume growth. As seen below, YoY recurring diagnostic revenues have continued to grow at a pretty high clip for the large part of the last 10 years. Part of it is due to great execution by the company and the growing mix of consumables as % of the revenue mix, but a key element of it is demographic trends.

Looking at younger individuals (e.g. Millennials/Gen Z), pets are becoming more like replacement kids and are driving these individuals to spend more for the care and well being of their pets. Based on the study by the company (below), spend by Millennial and Gen Z pet owners is set to expand in 2021. This strong tailwind should continue to drive growth for the company.

From a market sizing perspective, 60% of the company’s business is still stateside while 40% of the business is international. From a risk perspective, there is a degree of currency risk particularly if the US dollar strengthens. However, given that the international market is more untapped vs. the domestic market, it should provide the company with another strong avenue for growth. The company estimates its TAM to be ~$33B of which $22B is international and $11B is the US. Given that the company’s total revenues in 2019 were $2.5B, there is still a significant runway for growth.

Financial Analysis

Looking at the most recent quarterly results, the Company is still reporting solid revenue growth from $620MM for the quarter ending June 2019 to $637MM for the quarter ending June 2020. Given that this quarter took into account the trough volume periods due to COVID-19 related headwinds, the fact that the company was still able to grow is impressive. Similarly, profitability on the net income basis is strong and was up ~19% YoY. I believe this performance highlights the strength of the company’s platform, the management team, as well as the relatively insulated nature of the platform against COVID-19 related headwinds.

Risks

The company operates in a highly competitive space with many competitors such as Zoetis (NYSE:ZTS) having a similar platform, scale, and growth prospects.

The company has a sizable international business making up ~40% of the revenue mix. Thus, currency fluctuations particularly if the dollar strengthens as well as geopolitical risks can have a negative impact on the company.

The company did see a negative headwind from COVID-19 with volumes coming down slightly. Further COVID-19 related shutdown will have a negative impact on the company’s growth trajectory.

Valuation

The company currently trades at a significant premium to Zoetis on a P/E basis as seen below. Although you can argue that IDEXX may be the superior company, this valuation gap still does feel a bit extreme particularly as their growth rates are fairly similar. I would wait for a better entry point here.

ChartData by YCharts

Conclusion

Overall, IDEXX is a well-managed company with a strong record of platform expansion and growth. However, the valuation feels full at this time. I remain on the sidelines waiting for a better entry point.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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