MWI Veterinary Down despite Q3 Earnings and Revenue Beat

Zacks

MWI Veterinary Supply, Inc. (MWIV) reported third-quarter fiscal 2014 earnings per share (EPS) of $1.52, up a significant 15.2% year over year and ahead of the Zacks Consensus Estimate of $1.50 by 1.3%.

However, this positive piece of news failed to boost investors’ confidence. The company’s share price has declined 3.7% since the announcement of the third quarter results to close at $144.00 yesterday.

 

Revenues in Detail

Third-quarter revenues (including the impact of the IVESCO Holdings acquisition closed on Nov 1, 2013) increased 28.4% year over year to $778.4 million surpassing the Zacks Consensus Estimate of $762 million.

Revenue growth in the U.S. was 30.4% on a year-over-year basis on the back of both IVESCO acquisition-related and organic growth. Both the companion animal and production animal markets also showed strong improvement. During the quarter, 2% of the revenue growth in the U.S. came from flea, tick and heartworm products. 

Internet sales to independent veterinary practices and producers in the U.S. increased 26% during the third quarter. Diagnostic revenue reached $47.3 million, up 8% over both the prior year quarter as well as the prior calendar quarter. Pharmacy fulfillment business increased 30% to $66.8 million.

On the other hand, revenues from the U.K. increased 14%, as a result of a 4.1% organic growth and a 9.9% increase related to foreign currency translation. Commissions increased 24.9% year over year to $6.0 million.

MWI Veterinary's pharmacy fulfillment business grew 30% year over year to $66.8 million. However, the company’s Micro business was impacted by the recall of a number of beta-agonist products in Sep 2013. This product was replaced with a more competitive product. According to the company, while the two products have similar growth margins, the competitive product sells for about half of the suspended product's price. Going ahead, MWI Vet expects this headwind to persist in the remainder of fiscal 2014.

While the total number of Micro Weigh machine placements was 8 units during the quarter, placements into dairy customers totaled two units. As of Jun 30, 2014, Micro Weigh machine base was 245 units.

MWI Veterinary's commissions increased 24.9% year over year to $6 million driven primarily by increased billings for agency products and earning certain incentives. Vendor rebates increased $2.6 million from the year-ago period, due to growth in revenues.

Operational Update

Gross profit improved 25.8% to $97.5 million in the quarter. However, gross margin contracted 26 basis points (bps) year over year to 12.5% in the quarter due to the addition of the low-marginIVESCO business in November.

Despite the 30.4% rise in selling, general and administrative (SG&A) expenses to $63.2 million, MWI Veterinary's adjusted operating income climbed 17.9% to $34.3 million. The increase in SG&A expenses was induced primarily by the addition of the IVESCO business in Nov 2013. However, operating margin contracted 38 bps to 4.4% in the quarter.

Financial Update

MWI Veterinary exited the third quarter with cash balance of $2.64 million compared with $953,000 at the end of fiscal 2013.

Guidance

Including the impact of the IVESCO acquisition, MWI Veterinary upgraded its business outlook for fiscal 2014. The company envisages revenues of $2.91–$2.96 billion (up from earlier range of $2.89–$2.94 billion) reflecting annualized growth of 24%−26% (23%−25%). The current Zacks Consensus Estimate of $2.95 billion falls close to the higher end of the guidance range.

EPS forecast has been narrowed to the range of $5.57–$5.67 (earlier $5.47–$5.67) and reflects annualized growth of 12.5%−14.5% (10.5%−14.5%) in fiscal 2014. The current Zacks Consensus Estimate of $5.62 lies within the company’s guidance range.

Our Take

MWI Veterinary reported a better-than-expected fiscal third quarter with both revenue and EPS beat. Moreover, the quarter’s performance reflected a solid improvement over the prior-year period’s numbers. We believe MWI Veterinary is well positioned to take advantages of certain tailwinds like the IVESCO acquisition, which is expected to be accretive to fiscal 2014 earnings and facilitates the company to serve customers better as a pioneer in full service animal health distribution. In addition, the company's value-added services and its plan to implement warehouse management system in the remaining MWI distribution centers by fiscal 2014 are expected to benefit the company in the recent future.

Zack Rank

Currently, the stock carries a Zacks Rank #3 (Hold). Some of the better-placed stocks in the broader Medical sector are Edwards Lifesciences Corp. (EW), Hologic Inc. (HOLX) and Abaxis, Inc. (ABAX), all carrying a Zacks Rank #2 (Buy).

Read the Full Research Report on HOLX
Read the Full Research Report on EW
Read the Full Research Report on ABAX
Read the Full Research Report on MWIV


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