We recently reiterated our Neutral recommendation on
MWI Veterinary Supply
) with a target price of $112.00.
Economic uncertainty in the U.S. and U.K. has affected both the
companion animal and production animal markets with tightening
credit. Moreover, volatile commodity prices of milk, grain, corn
and feeder cattle and changes in weather patterns affect demand in
the production animal market. Moreover, we are also 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 augmented its outlook for fiscal 2012. The company's
third quarter 2012 earnings per share (EPS) came in at $1.15,
surpassing the Zacks Consensus Estimate of $1.06 and increasing
26.4% year over year. The company reported a robust 35% increase in
revenues to $554.7 million and comfortably surpassed the Zacks
Consensus Estimate of $514 million.
The company also raised its revenue and EPS guidance to
$2.05-$2.07 billion (earlier guidance was $2.0-$2.03 billion) and
$4.14-$4.20 ($3.96-$4.06) respectively. This represented annualized
sales growth of 31−32% (earlier expectation was 28−29%) on EPS
growth of 22−24% (16−19%).
Revenues over the last 11 years have grown at a compound annual
growth rate (CAGR) of 21%. Organic revenues, attributable to
existing customers, represented approximately 68% 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 19% year-over-year increase in organic growth in this
The company has adopted several key initiatives to boost sales.
This includes investment in technology and distribution center
infrastructure in the U.S. and U.K. The company is to set up new
distribution centers soon. Moreover, during the quarter, MWI Vet
started emphasizing on five new sales regions. It plans to expand
sales force to increase market penetration by gaining new
At the end of June 2012, the company increased its field sales
representatives to 308 (from 224 in the year-ago period) with 170
telesales representatives (unchanged) in the U.S. In addition, MWI
Vet has been trying to focus on value-added services, including the
e-commerce platform, pharmacy fulfillment programs for both
production and companion animal products. We believe that these key
strategies hold immense potential for the company's future
Moreover, MWI Vet is looking to preserve long-term customer
relationships as well as build new ones. During the quarter, the
company formed a revised distribution relationship with
a manufacturer of veterinary diagnostic products. Both
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.
MWI Vet expects to continue the growth momentum on the back of
suitable acquisitions, sales force expansion, improvement in
operating expense structure and investment in personnel, technology
and distribution centers. Based on this encouraging performance, we
have raised both the EPS and revenue estimate of MWI for fiscal
However, MWI Vet operates in a highly competitive veterinary
distribution services market, with players like
) and Lextron Animal Health. Presently, MWI retains a short-term
Zacks #2 Rank (Buy).
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