MWI Veterinary Misses on Q2 Earnings, Shares Sink

Zacks

MWI Veterinary Supply, Inc. (MWIV) reported second-quarter fiscal 2014 earnings per share (EPS) of $1.32, up 10.9% year over year. However, it missed the Zacks Consensus Estimate of $1.36 by 2.9%.

Following the earnings announcement, the company's share price declined 16% to close at $137.82 on May 7.

Revenues in Detail

Revenues in the second quarter increased 28.1% year over year to $721.3 million surpassing the Zacks Consensus Estimate of $714 million.

Revenues from the IVESCO business amounted to $120.2 million for the second quarter that ended on Mar 31, 2014. Of the IVESCO revenues, approximately 44% were from sales to overlap customers.

After excluding the impact of the IVESCO acquisition (closed on Nov 1, 2013), revenue growth in the U.S. was 8% on a year-over-year basis. Despite severe weather conditions experienced during the second quarter, this year-over-year growth came on the back of contributions from high single-digit growth in companion animal and strong single-digit growth in production animal market (excluding the benefit of the IVESCO acquisition). Further, it also benefited from the increased sales diagnostic lines which constituted 1.2% of the growth. MWI Veterinary's Diagnostic revenues increased 15.8% to $44 million from $38 million in the year-ago quarter.

Internet sales to independent veterinary practices and producers in the U.S. increased 24.5% during the second quarter. Revenues from the Diagnostics Unlimited program to all customers went up approximately 15.6% to $43.7 million. An upside in flea, tick and heartworm products represented another 0.4% of revenue growth in the quarter, after being affected by the launch of a new product sold under an agency relationship. Moreover, revenues from Veterinary Pharmacy programs (after excluding IVESCO) in the U.S. grew 17.1% to $59 million.

On the other hand, revenues from the U.K. slipped 0.8% year over year as a result of organic decrease of 6.8%. However, this decline was partially offset by a 6% increase related to favorable foreign currency translation. Excluding the impact of a single large customer, organic revenue growth in the U.K. was 8% before the additional benefit of foreign currency translation.

MWI Veterinary's pharmacy fulfillment business grew 17% year over year (excluding IVESCO) to $59 million. While the total number of Micro Weigh machine placements was 8 units during the quarter, placements into dairy customers totaled two units. As of Mar 31, 2014, Micro Weigh machine base was 237 units. (Figures reported are net of IVESCO).

MWI Veterinary's commissions increased 15.7% year over year to $5.9 million driven primarily by an incentive earned during the second quarter as against no such incidence in the year-ago quarter. Vendor rebates increased $3.9 million from the year-ago period, due to growth in revenues and timing of manufacturer programs.

Operational Update

Gross profit improved 22% to $91.1 million in the quarter. Cost of products sold rose 29% to $630.2 million. Moreover, gross margin contracted 70 basis points (bps) year over year to 12.6% in the quarter.
Despite the 26.7% rise in selling, general and administrative (SG&A) expenses to $60.7 million, MWI Veterinary's adjusted operating income climbed 13.2% to $27.4 million. The increase in SG&A expenses was induced primarily by the addition of the IVESCO business in Nov 2013. However, operating margin contracted 50 bps to 3.8% in the quarter.

Financial Update

MWI Veterinary exited the second quarter with cash balance of $2,632,000 compared with $953,000 at the end of fiscal 2013.

Guidance

MWI Veterinary reaffirmed the business outlook for fiscal 2014. The company envisages revenues of $2.89–$2.94 billion reflecting annualized growth of 23%−25%. The current Zacks Consensus Estimate of $2.95 billion approximately falls at the higher end of the guidance range.

EPS is forecasted in the range of $5.47–$5.67. The EPS outlook reflects annualized growth of 10.5%−14.5% in fiscal 2014. The current Zacks Consensus Estimate of $5.63 lies near the higher end of the company’s guidance range.

Our Take

MWI Veterinary reported a mixed fiscal second quarter with a revenue beat but bottom-line miss. Earnings lagged the Zacks Consensus Estimate, although it reflected a solid improvement compared to the prior-year quarter's earnings. 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

Given the lower-than-expected earnings performance, the stock presently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the medical/dental supplies industry include The Cooper Companies Inc. (COO), Milestone Scientific Inc. (MLSS) and Steris Corp. (STE). All three stocks carry a Zacks Rank #2 (Buy).
 

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