Animal health care chain VCA Antech Inc. has a business model that many of its struggling human hospital counterparts would envy.


It's not only the largest operator of standalone animal hospitals, but the largest provider of diagnostic laboratory services and a leading provider of imaging services. That makes the Los Angeles-based company well positioned to capitalize on a trend toward preventive veterinary care as opposed to merely treating illness or injury.


Then there are the pet owners, who pay in full as care is rendered, so clinics face little bad debt and no exhausting reimbursement battles with tight-fisted health insurers. Vet clinics also face fewer regulatory and compliance issues than human hospitals.


The company also counts many of its competitors in the hospital business as customers for its laboratory and imaging services. And as many baby boomer vets in the still largely mom-and-pop industry look toward retirement, VCA can acquire the best of those practices to continue its growth.


Even so, Wall Street is cautious, with only a handful of analysts rating its stock the equivalent of a "buy." While they love the company and its amusing "WOOF" ticker symbol, analysts tend to think shares are fairly valued given their steady appreciation and growth prospects. Shares, which closed at $28.54 on March 22, have risen 43 percent in the last 12 months.


"I've followed the stock for a long, long time and it's always been my favorite name, but I downgraded it a couple of months ago solely due to valuation," said Stanford Group Co. analyst Bilal Basrai, who downgraded shares to "hold" in November. "The fundamentals will continue to remain great, but for a health care services company, a PEG of 1.5 is tough to justify."


A PEG is a stock's price-earnings ratio divided by its year-over-year earnings growth rate. Generally the lower the PEG, the better the value because an investor would be paying less for each unit of earnings growth.


VCA Antech owns or operates 367 pet hospitals employing more than 1,200 vets in 38 states. Aside from neighborhood veterinary clinics, its largest competitor is Banfield The Pet Hospital, which operates clinics at more than 375 pet stores owned by Phoenix-based PetSmart Inc.


A January study by investment banker William Blair & Co. found only a third of VCA hospitals were within a five-mile radius of an existing or soon-to-open Banfield facility, which analyst Ryan Daniels considers important because pet owners tend to go to vets within five miles of their home.


The company has set a goal of adding 20 to 25 independent animal hospitals per year with aggregate annual revenues of approximately $30 million to $35 million. The company also keeps an eye out for privately held chains to snap up, acquiring the 67-hospital National PetCare Centers Inc. in 2004 and 46-hospital Pet's Choice Inc. last June.


The rapid integration necessary to make VCA's growth-through-acquisition strategy work so far has been skillfully handled, Basrai believes, with the company usually able to get an acquired clinic up to corporate margins within two months, compared to a 1 1/2 years for a typical human hospital.


That's especially important since most of the 26 percent growth in the animal hospital business in the fourth quarter came from recent acquisitions. Revenue at animal hospitals open at least a year was up just 4.4 percent.


The company in the fourth quarter beat the consensus of analysts polled by Thomson Financial, earning $17.1 million, or 20 cents per share, up 28 percent from the same period a year ago. Revenue rose 23 percent to $217 million.


For the full year, VCA earned $67.8 million, or 81 cents a share, up 7 percent from 2004. The company last month gave conservative guidance for 2006, anticipating that lab revenue would grow between 7 percent and 9 percent, with same-store sales at its hospitals up between 3 percent to 5 percent.


Analysts see a leading revenue growth driver in the company's diagnostic lab business, where the company operates a nationwide network of 28 labs that serve more than 15,000 of the nation's 17,000 animal hospitals. Its 37 percent operating margins trounce the 17 percent obtained by Quest Diagnostics, a leader in the human diagnostics market.


"The biggest risk to (VCA's) shares ... is a slowing of growth in the laboratory business due to competition and the inevitable maturing of the business," Basrai said in a recent note to investors. But he believes the company can continue to show close to the same 10 percent growth in the lab division for the next 18 months as it reported in the fourth quarter.

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