WOOF: Top Dog in Pet Care

12/11/2013 10:00 am EST

Focus: HEALTHCARE

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliott Gue highlights a healthcare stock with a strong and growing market—and is completely free from any of the controversies of the national healthcare debate, in Capitalist Times.

Steve Halpern: We're here today with Elliott Gue, editor of Capitalist Times. How are you doing Elliott?

Elliott Gue: Good, how are you? Thanks for having me on the show.

Steve Halpern: Great, thank you for joining us. There's been a big debate in the country over healthcare, but you know that there's one sector that's immune from controversy. Can you tell us a little about the healthcare market that recently caught your attention?

Elliott Gue: Absolutely. As all the listeners know, the healthcare market for humans in the US is changing a lot with the Affordable Care Act, which is starting to go into effect. There're new taxes on certain segments of the healthcare sector.

There's a lot of uncertainty over healthcare insurance companies and how they're going to be reimbursing patients. There's just a lot of uncertainty across all levels of the healthcare industry as a result of this large, new law that's coming into effect, gradually, over the next few years.

There's one sector of the healthcare market that's totally independent of that. There's no exposure to Medicare, no exposure to Medicare reimbursement, no exposure to new taxes, and 99% of all the patients actually pay in cash at the time of care, so you don't even have to wait for an insurance company to reimburse you.

And what that is, actually, is the market for veterinary care for dogs, cats, and other animals. You know, there are 189 million companion animals in the US, pets, about 165 million dogs and cats.

Almost two-thirds of US households own at least one pet, and we actually spend a combined $30 billion dollars annually on veterinary health services and, unlike the human healthcare market, obviously the Affordable Healthcare Account doesn't apply.

Again, 99% of all veterinary treatments are paid for on the spot in cash, so there's no waiting around for doctors for reimbursement for Medicare or health insurance companies of any type.

Even if you do have health insurance, which is a pretty small market right now, in most cases, you actually pay for the care up front and then the insurance company actually reimburses the owner, so the doctor doesn't have to sit around for that check to come through.

The other thing to keep in mind is that people, especially in the United States and Canada, are very diligent about taking care of their pets, making sure that they get their annual check-ups, making sure that they get the best quality of care, making sure that they get tested for all kinds of maladies.

So, this is a huge market and it's growing very rapidly and, again, it doesn't have any exposure to the Health Care Act.

Steve Halpern: Again, in terms of the growth of that market, you point out in your research that, beyond the traditional veterinary services, there is a growing market, based on things such as diagnostics, whereby new changes are coming. How is the veterinary market expanding?

Elliott Gue: Oh, the veterinary market's really shifting and becoming a lot bigger. What's happening is that a lot of treatments and testing, that's been done on humans routinely, is now being adapted for the veterinary market.

One benefit of that, of course, is—unlike the human market—getting approval to do new tests or for new drugs is much easier when it comes to the veterinary market.

In many cases, what they're doing is, they're taking tests and drugs that are given to humans, that have been used in the human market for many years, and now they're adapting that for the veterinary market. This expansion, and the number of tests that are available for dogs and cats; blood tests, urine tests, other types of tests, it's just exploding.

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Healthcare for cats and dogs is becoming a lot more sophisticated every day, and that's great news for companies in this market, because a lot more of those advanced procedures—that traditionally have only been done on humans—are now being adapted to the veterinary market.

I had a cat a few years back, back in 2005, who passed away from kidney related disease, now they have treatment for that, which just wasn't available, just as recently as 2005. This is a very high-margin business for veterinarians, because these are more advanced procedures that also carry a much higher price tag.

Steve Halpern: One of the biggest players in this field is VCA Antech, which probably has one of the best stock exchange symbols. It's (WOOF). Could you tell us a little about this company?

Elliott Gue: Absolutely, VCA Antech—with the symbol WOOF—they basically have two business segments. About three-quarters of their revenue come from animal hospitals and they're all branded as VCA Animal Hospitals.

They control—there are about 52,000 active veterinarians and about 22,000 animal hospitals in the US, and VCA is one of the largest players in that market with more than one-third market share, and what they've been doing, actually, in recent years, is making acquisitions.

So, they go out and they find veterinary practices that typically have an average of around three to five veterinarians working there, maybe $1 to $3 million dollars in annual revenue, and they purchase those practices as existing revenue generating practices.

And by integrating things like billing, ordering, drugs, and other supplies for the market, they're able, of course, to lower the cost that those individual practices face, and also, by putting them in that system of VCA Animal Hospitals, it makes it easier for consumers to find their locations.

And a lot of their locations, the majority are located in metropolitan areas, where they have easy access to a large portion of the population.

Now, if you look at the other side of their business, which is, actually, potentially more interesting, about 20% of their revenues (but about 50% of their profits), comes from the Antech Diagnostics Business.

Now, I mentioned earlier that a lot of human tests for things, like kidney disease, are being adapted for the veterinary market and what VCA Antech does, is they actually pick up samples—blood samples, urine samples, that sort of thing—from all these veterinary practices, not just the ones that VCA Antech actually runs, but also independent practices.

They have, by far, the largest market share in this business. A little more than 50% of the US and Canadian market for diagnostics.

And what they're actually able to do is, in most metropolitan areas, they can pick up samples twice a day and actually get results back to those doctors in those individual veterinary practices the next day, or, in some cases, the same day, and few other companies can actually compete with them on the speed at which they're able to get diagnostic results back.

The other thing is, they're expanding the total number of tests that they do, so right now, they're doing over 200 different individual tests, on dogs and cats primarily, and they're actually continually expanding into new testing areas—again, adapted from the human healthcare market—which, some of those new fancier, sort of, more advanced tests actually carry much higher profit margins for them. That's really the crown jewel of their business.

Steve Halpern: I noticed that, in Capitalist Times, you put the stock in what you call your Wealth Builder's Portfolio. Could you explain what this portfolio is and how this company fits those goals?

Elliott Gue: Absolutely, well we have two portfolios in Capitalist Times—we have the Lifelong Income Portfolio, which is focused, primarily, on dividend yield, and the Wealth Builder's Portfolio, where we look at the total return portfolio—and I think one of the things that a lot of investors don't understand is, even if you consider yourself to be a growth investor, that doesn't mean you should ignore dividends.

Many of the stocks we recommend there are for dividends, or return capital shareholders in other ways as well, like buying back stock, but in the Wealth Builder's Portfolio, we focus in on total return. One of the things we look for is a catalyst for upside for a company that we recommend.

You know, in this case, I could see two. In the short-term, on the cyclical front, one of the things, you know, the housing market's quite leveraged to healthcare spending on pets, because people, when they form new homes or rent an apartment or buy an apartment or buy a home, they tend to buy a pet as well.

So, in the housing market recovering, we're seeing a real uptick in sales and revenues for companies like VCA Antech.

And the second thing, as I mentioned before, the second catalyst for them, is really, their expansion of that Antech business into all kinds of new diagnostic tests, which have much higher margins, and I think that's going to help improve their margin across the board for that company.

Steve Halpern: Well, thank you, it was a fascinating conversation. I really appreciate you taking the time today.

Elliott Gue: Thanks for having me.

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