IDEXX Laboratories operates in the animal health sector, which is a resilient, essential, and expanding industry. This indicates that the company operates in a compelling market. IDEXX Laboratories is one of only 38 companies that have achieved a compound annual growth rate (CAGR) of 18% or more over the last 30 years. Thus, IDEXX Laboratories has been a good investment historically. The question is whether IDEXX Laboratories will also be a good investment for the future. It is what I'm going to investigate in this analysis.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of IDEXX Laboratories. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I do not own any stocks in any of IDEXX Laboratories' direct competitors either. Thus, I have no personal stake in IDEXX Laboratories. If you want to purchase shares or fractional shares of IDEXX Laboratories, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
IDEXX Laboratories (IDEXX) was founded in 1993 in Maine, United States. IDEXX develops, manufactures, and distributes products primarily for the companion animal veterinary, livestock, poultry, dairy, and water testing markets. The company operates through three segments: Companion Animal Group, Water Quality Products, and Livestock, Poultry, and Dairy. The Companion Animal Group segment offers diagnostic and information management-based products and services for the companion animal veterinary industry. This includes in-clinic diagnostic solutions, outside reference laboratory services, and veterinary software and services. The Companion Animal Group segment is the largest segment, contributing approximately 92% of the revenue. The Water Quality Products segment offers innovative testing solutions for the easy, rapid, and accurate detection and quantification of various microbiological parameters in water. The Water Quality Products segment is the second-largest segment, contributing 5% of the revenue. The Livestock, Poultry, and Dairy segment offers diagnostic tests, services, and related instrumentation used to monitor the health of livestock and poultry, enhance producer efficiency, and guarantee the quality and safety of milk. The Livestock, Poultry, and Dairy segment is the smallest segment, contributing approximately 3% of the revenue. IDEXX generates approximately 65% of its revenue in the United States and 35% internationally. The vast majority of IDEXX's revenue comes from recurring sources, such as the sale of consumables, reagents, and subscription services. The breadth of IDEXX's full diagnostic solution, including novel products and services developed and made available exclusively by IDEXX, as well as the seamless software integration of their offerings, is what gives IDEXX its moat.
The CEO is Jay Mazelsky. He joined IDEXX in 2012 and held various leadership positions until being appointed as CEO in 2019. Before joining IDEXX, he held leadership positions at Philips Healthcare and Agilent Technologies. He also gained experience from various non-leadership roles at Hewlett Packard. He holds a bachelor's degree in Mathematics from the University of Rochester and an MBA from the University of Chicago. He is known for his extensive experience in developing and implementing strategies for long-term sustainable growth at IDEXX. This includes transforming IDEXX's go-to-market strategy in North America in 2014, significant international commercial expansions, investments in innovation, and a focus on providing a unique customer experience. In his various roles at IDEXX, he has accumulated significant experience in managing global enterprises. This includes ensuring product availability and on-time delivery despite supply chain obstacles, acquiring and integrating the IDEXX ezyVet software product line, and expanding IDEXX's warehouse, distribution, and manufacturing capacities to facilitate ongoing expansion. We don't have much information about Jay Mazalsky, but since becoming CEO, he has managed to increase both profit margins and free cash flow per share, which is something I appreciate as an investor. Therefore, his results, combined with his experience in the company, make me confident in Jay Mazelsky leading IDEXX moving forward.
I believe that IDEXX has a moat. I have confidence in the management as well. Now, let's analyze the numbers to determine if IDEXX meets our criteria for possessing a competitive advantage. If you need an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.
The first metric we will investigate is the return on invested capital (ROIC). I would like a 10-year history demonstrating a minimum annual growth of 10%. IDEXX has delivered impressive results over the past ten years, with a Return on Invested Capital (ROIC) consistently exceeding 37% each year and surpassing 40% in seven out of ten years. ROIC has decreased in 2023, which requires monitoring, and I aim for ROIC to increase again in 2024. However, I won't consider it concerning as IDEXX still manages to deliver a Return on Invested Capital (ROIC) above 40%, a feat achieved by only a few companies. Therefore, to summarize. ROIC has been great over the past ten years, but I would like to see ROIC start growing again in 2024.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most significant of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. The numbers are a bit mixed as there is a four-year period where IDEXX has delivered negative numbers. In some cases, companies use debt to buy back shares, which affects their equity. However, I am unsure if this is the case for IDEXX. The positive aspect is that IDEXX has achieved high equity from 2020 onwards compared to historical figures, coinciding with Jay Mazalsky's tenure as CEO. It is also encouraging to see that equity reached an all-time high in 2023. Despite the negative numbers from 2015 to 2018, I am encouraged by the number due to the latest development.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising to note that IDEXX has consistently generated positive free cash flow every year for the past ten years. It is encouraging that free cash flow has increased year over year in most cases, and IDEXX managed to deliver its highest free cash flow ever in 2023. Levered free cash flow margin also reached its all-time high in 2023, which is another encouraging sign. Free cash flow yield is at the ten-year average. However, a free cash flow yield of 1,7% indicates that the shares are currently trading at a premium price. We will delve deeper into this later in the analysis.
Another important aspect to consider is the level of debt. It is crucial to determine if a business has manageable debt that can be repaid within a three-year period. We calculate this by dividing the total long-term debt by earnings. After analyzing IDEXX's financials, I found that the company has 0,74 years' worth of earnings in debt. It is less than three years' worth of earnings in debt, which means that debt is not a concern for me when investing in IDEXX. It is also worth noting that this is the lowest earnings-to-debt ratio that IDEXX has had in the last decade.
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Based on my findings so far, I find IDEXX to be an intriguing company. However, no investment is without risk, and IDEXX also has its fair share of risks. One of the risks is competition. In its annual report, IDEXX mentions that the companion animal healthcare industry is highly competitive. They anticipate increasing levels of competition from both existing competitors and new sector entrants due to the industry's strong growth and returns. IDEXX competes with many companies, ranging from large human and animal health pharmaceutical and medical diagnostics companies to small businesses focused on animal health. Its competitors vary in different business areas and regions. In some cases, academic institutions, governmental agencies, and other public and private research organizations conduct research activities and may commercialize products or services that could compete with IDEXX products. Furthermore, several of IDEXX's direct and potential competitors have substantially greater financial resources than IDEXX, as well as more experience in manufacturing, marketing, research and development, and obtaining regulatory approvals than IDEXX does. Dependent on third-party suppliers. IDEXX relies on third-party suppliers to provide components and raw materials for their manufactured products, manufactures some of the products they sell, and provides certain services, including package delivery services. Actions taken by third-party suppliers in operating their business, as well as any disruptions to their business operations (or their suppliers' business operations), could disrupt IDEXX's supply chain or operations and materially negatively impact IDEXX's ability to supply the market, substantially decrease sales, lead to higher costs, and damage our reputation with customers. Longer-term disruptions could potentially lead to the permanent loss of customers, resulting in a decrease in our recurring revenues and long-term profitability. Government regulations. IDEXX sells products and services in more than 175 countries and operates within an increasingly complex legal and regulatory environment. Many of IDEXX's products are subject to comprehensive regulation by U.S. and foreign regulatory agencies. These regulations cover various aspects such as product approvals, registrations, manufacturing, import, export, distribution, marketing, promotion, labeling, recordkeeping, testing, quality control, storage, product disposal, environmental compliance, and workplace safety. Any failure by IDEXX to comply with applicable legal and regulatory requirements, or to adjust to changing legal and political environments, could result in fines, penalties, and sanctions; product recalls; suspensions or discontinuations of, or limitations or restrictions on, IDEXX's ability to design, manufacture, market, import, export, or sell its products; and damage to its reputation. Any of these factors could have a negative impact on IDEXX's business.
There are also numerous reasons to invest in IDEXX. One reason is that IDEXX operates in an expanding industry. IDEXX believes that only 15% of the companion animal diagnostics market is served. It means that there is a $45 billion underserved market now. The market is expected to grow due to the expanding pet population, longer pet lifespans, and increasing care expectations. Furthermore, pet owners today are younger and wealthier than in the past. The bond between animals and humans is also growing stronger, leading pet owners to prioritize animal health more than ever before. A survey of pet owners found that 84% of the respondents believe that taking care of their pet's health is as important as taking care of their own health. 85% of the respondents answered that they would reduce their personal spending to pay for pet-related costs. The software business is growing. IDEXX delivered very strong performance in 2023 by expanding their veterinary software services and diagnostic imaging segment, with revenue increasing by 11,4% from 2022 to 2023. However, the highly profitable recurring revenues in the veterinary software diagnostic imaging segment increased by 18,8% year over year. This increase provides a growing and attractive profit stream to the company, delivering a multiplier benefit as loyal software customers increase their diagnostic revenues at a faster rate. IDEXX expects the growth to continue. Management mentioned that clinics are increasingly embracing the opportunity to integrate software into various aspects of their business. They use technology to generate diagnostic insights, eliminate pain points across back-end areas of the clinic, and establish meaningful lines of communication with their growing younger customer demographic. IDEXX is growing internationally. IDEXX has made seven targeted international expansions since 2021, and management has mentioned that these are attractive, high-return investments that support future growth by delivering high-touch commercial engagement in IDEXX's fastest-growing regions. Management also mentioned that IDEXX's international business performance is showing the benefits of their expanded global commercial capability as IDEXX continues to achieve strong new business gains, reflected in the 13% expansion of its international premium installed base this year. This expansion resulted in a 10% organic growth in recurring revenue for the international Companion Animal Group Diagnostics. The expansion internationally is important because IDEXX believes that international Companion Animal Diagnostics Spending will grow at a 10% compound annual growth rate (CAGR) until 2047.
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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 10,06, which is from the year 2023. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 18% in the next five years, but 15% is the highest number I use. Additionally, I have selected a projected future P/E ratio of 30, which is double the growth rate. This decision is based on IDEXX's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $301,80. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy IDEXX at a price of $150,90 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 907, and capital expenditures were 134. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 94 in our calculations. The tax provision was 216. We have 83,032 outstanding shares. Hence, the calculation will be as follows: (907 – 94+ 216) / 83,032 x 10 = $123,93 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With IDEXX's free cash flow per share at $9,31 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $146,97.
I find IDEXX to be an intriguing company with good management. IDEXX has consistently delivered a high Return on Invested Capital (ROIC) and has just achieved its highest free cash flow and levered free cash flow margin. Competition is a risk for IDEXX, but the company has managed to deliver exceptional results over the past 30 years. There is no indication that competitors will pose a threat to its business in the short term. However, management is anticipating growing competition, so it is something that needs to be monitored. IDEXX is dependent on its third-party suppliers, and IDEXX cannot control the operations of these suppliers. This means that IDEXX's business can be affected by factors beyond its control. However, I believe that IDEXX has done its due diligence when it comes to third-party suppliers. Finally, IDEXX is subject to government regulations. Non-compliance could potentially harm its business in both the short-term and long-term. However, there is no indication that IDEXX will not comply with these regulations in the future. IDEXX believes that the market they operate in is significantly underserved, and there are several trends that indicate the market will expand in the future. Furthermore, IDEXX is expanding its software services and diagnostic imaging segment, which is highly profitable and recurring. Finally, IDEXX is also expanding its international operations because the company believes that international spending on Companion Animal Diagnostics will grow at a higher rate than in the U.S. I believe there is great potential for IDEXX, and I would love to own shares in the company. Thus, I will buy shares if they reach $301, which is the intrinsic value of the Margin of Safety price.
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