Morningstar | Idexx Delivers Solid 4Q, but Outlook for 2019 Seems Conservative; No Change to Our FVE
Idexx Labs posted fourth-quarter and full-year results that closely lined up with our expectations, and we’re leaving our fair value estimate unchanged at this point, despite the slight dip in share price. Management’s outlook for 2019 struck us as somewhat conservative, leaving our projections for this year at the high end of management’s range. We recognize foreign exchange headwinds could strengthen in the coming quarters, which would lead us to revisit our estimates. Nonetheless, since we value Idexx over such a long period of time, these types of exchange adjustments to any given year are often immaterial to our valuation. We see little reason to shift our thinking on Idexx’s narrow economic moat, as the firm continues to introduce innovative diagnostic technology.Most of what we saw in Idexx’s fourth quarter was fairly typical for the firm, with total quarterly revenue up 10% organically, fueled by low-teens growth in the companion animal diagnostic segment. We’re pleased to see the higher-margin VetLab consumables become a larger proportion of total sales--up 300 basis points since the firm moved to all-direct distribution in late 2014. We think this shift was largely responsible for the 200-basis-point improvement in gross margin since the effort began. Considering the relatively benign macroeconomic conditions, we don’t anticipate any major disruption to spending on pet healthcare.
However, we did discern a potential red flag in Idexx’s fourth-quarter survey data that suggests there could be a slowdown in vet office traffic. In the usual seasonal patterns, we see that vet office visits are heavier during the second and third quarter when the weather is warm, first quarter is historically the weakest quarter due to winter, and fourth quarter is in between. In late 2018, vet office traffic was lighter than first quarter. This may simply be one quarter of aberration, but we’ll be keeping a eye on it as we head into the first half of 2019.
IDEXX Laboratories develops, manufactures, and distributes products and provides services primarily for the companion animal veterinary, livestock and poultry, dairy and water testing markets. The company operates primarily through three business segments: Companion Animal Group, which provides diagnostic and information management-based products and services for the veterinary market; Water Quality Products, which designs, develops, manufactures, and distributes products used in the detection of various microbiological parameters in water; and Livestock, Poultry and Dairy, which provides diagnostic products and services for livestock and poultry health.
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