The average American is about as unlikely to skimp on Fido’s health care as they are on their children’s. Point of fact: Veterinary services chain VCA Antech Inc.’s financials held steady even during the 2001-02 recession.
So when Los Angeles-based VCA earlier this month warned that economic concerns in the previous quarter dampened revenue growth at its clinics, laboratories and imaging services, investors could hardly believe it chopping 18 percent off the Wall Street darling’s stock price.
VCA confirmed the slower growth in its formal earnings release last week, but executives sought to reassure investors during the conference call and focus on the upsides at the nation’s largest public veterinary chain.
They acknowledged that stiffer competition in the lab business was cutting into revenues and profits, but noted unusually bad weather and California’s wild fires were seasonal hits that slowed traffic at some clinics. On the upside, the company has made a series of acquisitions that are expected to renew growth.
“We are in a phenomenal industry that’s just a little choppy right now, but we’re still investing very aggressively in the industry,” said Chief Executive Robert Antin. “Our demand comes from people who view their pets as part of the family.”
Growing steadily over the past decade to become the nation’s largest network of veterinary clinics, laboratories and imaging services, VCA consistently exceeds analyst expectations. Core to its growth strategy has been the acquisition of established practices, often from retiring vets. VCA then introduces efficiencies to make them larger and more profitable.
In the fourth quarter net income grew 27 percent to $24.6 million (29 cents a share), in line with analyst estimates, but the company’s 17 percent growth in revenues to $284.2 million fell below expectations.
More troubling was the company’s project earnings per share range for 2008 of $1.55 to $1.60 per share, which was below the consensus of $1.63. And the company narrowed the range of sales expectations.
Then there was the same-store revenue growth at its animal hospitals. At 2.5 percent for the quarter, it was down three points compared to the same period a year earlier. Laboratory revenue growth was 9.1 percent, down from 15.4 percent.
Acquiring nature
“I think we were all surprised by news in their pre-announcement, even though it is indicative of what we’ve been seeing in consumer discretionary spending,” said Jefferies & Co. analyst Arthur Henderson, who has a “buy” rating on shares. “But management is right this is a very resilient business.”
The company added 71 clinics in 2007, including the Healthy Pet chain. Ending the year with $111 million in cash, VCA spent some of that to acquire 15 clinics in the first six weeks of this year to bring the total to 453 hospitals.
VCA also is looking to export its business model over the border, recently acquiring a minority interest in a Canadian veterinary chain.
“If the economy improves they will definitely beat the guidance they’ve been giving,” Henderson said. “Even if things don’t improve much their guidance gives them enough padding that they should be able to come in at the mid or upper end of the range.”
However, Bank of America Securities analyst Robert Willoughby, who is “neutral” in shares, has been concerned about the company’s return on investment capital, which peaked at 12.6 percent in 2003. It has since deteriorated as VCA began to spend more for larger hospital franchises. The company last year paid $153 million to buy the 44-clinic Healthy Pet chain last year.
The company’s success has turned VCA into a rather pricey stock for its sector, closing at $32.99 on Feb. 21. Even after a sharp fall following the Feb. 5 pre-announcement, from which it has only slightly recovered, the stock was trading around 23 times last year’s earnings, a level that can only be supported by continued rapid growth.
