Fido’s health care
By Malcolm Berko
Dear Mr. Berko:
Please tell me what you think of VCA Antech, which sells for $21 a share.
A couple of folks we know have had good results with a VCA clinic.
SA, Wilmington, N.C.
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Dear SA:
VCA Antech Inc. (WOOF-$21) was known as Veterinary Centers of America before it changed its name a dozen years ago.
I first heard about WOOF in November 2001, when a reader from Cincinnati asked whether she should participate in a Credit Suisse Group initial public offering and buy the stock at $5.
I told her something like “I think it’s a good shot” or “I don’t think you could get hurt.” So she purchased 3,000 shares (1,000 shares for each of her kids) and, a few days afterward, sold the shares at $11.
Three years later, she sent an email busting my chops: “You were too dumb to advise me to hold the stock for the long haul,” she wrote.
That email could have knocked me over with a fender! The difference between this mother and a Rottweiler is that a Rottweiler eventually lets go.
Back in those days, WOOF was a dinky $345 million-revenue health care provider for emus, potbellied pigs, pythons, monkeys, hamsters, rabbits and the like.
This year, WOOF’s 10,000 employees (including 1,800 veterinarians), working from 600 animal hospitals and 55 diagnostic centers in 70 cities, will generate $1.8 billion in revenues. Those revenues will produce $125 million in net income, such that WOOF will report earnings of $1.45 per share to its bottom line. This is the largest animal health care provider (next to Medicare and Medicaid) in the U.S. WOOF derives 77 percent of revenues from its animal hospitals, 18 percent from clinical and laboratory services it provides to 15,000 small-animal hospitals nationwide and 5 percent from the sale of imagining equipment and medical technology.
WOOF’s animal hospitals are more efficient than most American hospitals, and the quality of care in too many cases is comparable.
As some of you know, I’ve had experiences with hospitals in India, Pakistan, Nepal, Sikkim, Bhutan, Russia and a few Caribbean nations. And on the whole, I’d prefer a WOOF clinic.
WOOF has a strong balance sheet: Debt is 33 percent of capital; the book value has grown eightfold since 2003; and working capital is more than $15 a share.
There are no preferred shares or pension obligations.
However, the income statement has had a few problems in the past decade. Operating margins have declined 40 percent, and net profit margins have fallen 30 percent, though share earnings have tripled and may continue modestly higher.
And I’m concerned that WOOF’s return on total capital and shareholder equity have fallen significantly in the past decade, and I think it’s time management gave something back to shareholders, such as a dividend or initiating a share buyback program. And that Vanguard, Lord Abbett & Co., Fidelity and State Street own sizable interests suggests that revenues and earnings will continue to ratchet higher.
However, Stifel Nicolaus, a classy brokerage out of St. Louis, recently issued a “sell” recommendation. I believe that WOOF, at 16 times earnings, is fairly priced and that the share price probably will mirror the market over the coming years.
I think that brothers and co-founders Robert and Arthur Antin need to spend more time watching corporate costs and less time playing golf.
An analyst with Fidelity thinks that “the Antins are becoming long in the tooth” and that WOOF needs fresher and more aggressive blood.
My guy at Fidelity doesn’t personally own the stock but brags about the money his family spends on pet care. He thinks WOOF could be a $33-$36 stock in the coming five years. I recall that a few years back, WOOF was trading in the high $40s. At that time, California unions (WOOF is domiciled in Los Angeles) almost persuaded employers to include pet health care insurance in their employee benefit plans.
When California’s unions succeed in adding this benefit to employee plans, the stock could take off like a missile. Rep. Nancy Pelosi, D-Calif., and the Antins are close, and Ms. Nancy may introduce enabling legislation in 2014.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.
© 2013 Creators Syndicate Inc.
