We recently reiterated our Neutral recommendation on MWI Veterinary Supply (MWIV) with a target price of $96.00.
MWI’s second quarter 2012 EPS came in at $1.04, surpassing the Zacks Consensus Estimate of 96 cents and increased 25.3% year over year. The company also reported a robust 38.2% increase in revenues to $507.2 million, which comfortably surpassed the Zacks Consensus Estimate of $465 million.
Revenues over the last 11 years have grown at a CAGR of 21%. The company’s expanding sales force has been able to increase market penetration by gaining new customers as well as increasing sales to existing customers. At the end of March 2012, the company increased its field sales representatives to 298 (from 224 in the year-ago period) with 168 telesales representatives (from 170) in the U.S.
In addition, MWI has been trying to focus on value-added services, including the e-commerce platform, pharmacy fulfillment programs for both production and companion animal products and other value-added services.The company’s organic growth in the U.S. was driven by its prompt customer service, rapid adoption of the e-commerce platform by veterinarians and strong performance of its sales force.
Additionally, independent veterinary practices have accounted for more than 85% of the products sold. E-commerce sales to independent veterinary practices and producers in U.S. improved 37%. Moreover, the company’s revenues from veterinary pharmacy programs increased by more than 46%.
Moreover, MWI is looking to preserve long-term customer relationships as well as build new ones. Organic revenues, attributable to existing customers, represented approximately 70% of revenue growth during the reported quarter while new customers accounted for the rest. We believe that these key strategies hold immense potential for the company’s future growth.
Despite the persistent flat-to-low growth rate in the veterinary market, primarily owing to the decline in consumer spending, we are encouraged by the company’s strong 2012 outlook. The company raised its revenue and EPS guidance to $2.0-$2.025 billion (earlier guidance being $1.90-$1.95 billion) and $3.96- $4.06 ($3.85- $4.00), respectively.
MWI 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 2012.
However, MWI operates in a highly competitive veterinary distribution services market, characterized by volatile commodity prices for milk, grain, corn and feeder cattle and changes in weather patterns to affect demand in the production animal market. The company competes with Henry Schein (HSIC) and Lextron Animal Health. We are also concerned about the vendor dependency of the company.
Presently, MWI retains a short-term Zacks #2 Rank (Buy). Over the long term, we have a Neutral recommendation on the stock.
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