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01/14/2005 12:00 am EST
With an estimated 58% of the US population owning pets, Stephen Biggar, vice president of equity research for Standard & Poor's, sees opportunity in the nation’s leading operator of veterinary centers. Here, he looks at a stock with the appropriate symbol, WOOF.
"There are several reasons why we
like animal healthcare services provider VCA Antech (WOOF
NASDAQ). We believe it possesses characteristics common to successful small-cap
growth stories. In our view, VCA offers a viable service that targets a
large and attractive market in which it maintains a leadership position.
The company has an established and reliable track record of successful growth,
which we view as sustainable. These factors should drive long-term growth and VCA's
stock, in our opinion. With the only nationwide veterinary-laboratory network
serving all 50 states, its 318 animal hospitals had more than 3.5 million
patient visits in 2003.
"As technology continues to migrate from the human healthcare sector to veterinary medicine, more sophisticated treatments and diagnostic tests are becoming available to treat companion animals. We believe these new and increasingly complex procedures, diagnostic tests, and drugs are gaining wider acceptance as pet owners are exposed to these previously unconsidered treatments through literature and marketing programs sponsored by large pharmaceutical and pet-nutrition firms.
"Unlike the human healthcare industry, providers of veterinary services are not dependent on third-party payers to collect fees. As a result, veterinary-services companies don't have the problems of extended payment-collection cycles or pricing pressures faced by human healthcare providers. Over 95% of VCA's animal-hospital services are paid for in cash or by credit card at the time of service. Over the past three years, VCA's bad debt expense has averaged just 1% of total revenue. Operating as a leader in a large, yet fragmented, market allows VCA the opportunity to leverage economies of scale as it consolidates small operators
"During our visit to VCA this year, we gained some insight into management's strategic mindset. We believe the current growth strategy of acquiring veterinary hospitals will continue into the foreseeable future, and we think that makes sense with a large market opportunity still available. We forecast 2004 revenue growth of 23%, and 2005 growth of 17%. Our 12-month target of $29 is based on a blend of discounted free cash-flow valuation and p/e-based metrics. Our model finds intrinsic value for VCA shares at $31. The stock carries our highest investment ranking of 5 STARS, or strong buy. With solid earnings, a huge market, and a sharp acquisition strategy, the nationwide chain of veterinary clinics leads the pack."
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