|
|
During the past 20 years, the author has watch China move from being a developing country into an industrial superpower
Money Moves, 5/24: Chocomize Co-Founder Fabian Kaempfer talks with Bloomberg’s Deirdre Bolton about the business of customizing chocolate
The president's campaign has a new rule—no cell phones allowed
In honor of remote control inventor Eugene Polley, we recognize other influential but neglected inventors who have felt the sting of stolen glory
Adam Johnson talks about what trading vehicles can help you earn more money per trade
The Italian automaker and others are adding hybrid technology to elite cars
The storied bridge that links San Francisco and Marin County changed the face of California
Schools cultivate ties with startups before they're big successes
Dave McClure's traveling venture capital show scours the world for promising startups
Get Four
|  | DECEMBER 21, 2004
 FOCUS STOCK By Markos Kaminis VCA Antech: The Cat's Meow [Page 2 of 2] SOARING REVENUE. We forecast 2004 revenue growth of 23%, and 2005 growth of 17%. In the laboratory segment, we expect 12% growth in 2004 to be driven by same-lab growth on increased usage of diagnostic testing by veterinarians. In the animal-hospital segment, we forecast 26% revenue growth, driven by 4.5% same-hospital growth and by acquisitions, including that of National PetCare Centers. In 2005, we expect 11% revenue growth for the laboratory business, driven by same-lab revenue growth on expansion of diagnostic testing across the industry. For the animal hospital segment in 2005, we look for a 15% revenue increase, absent the impact of the National PetCare Centers purchase from mid-2004, but driven mostly by other acquisitions. We expect same-hospital revenue growth in the low-single digits. The Sound Technologies buy in the fourth quarter should provide a boost to revenues with an immaterial impact on earnings per share in 2004 and a 1-cent increase in 2005. Our forecast calls for pro-forma gross margins to narrow by 60 basis points in 2004, to 26.9%, reflecting the impact of National PetCare Centers. As the company brings acquired locations toward its own operating model, we see margins widening. For 2005, we see gross margins up 20 basis points. We expect the lab segment to benefit from increased tests per client, and we anticipate pro-forma segment gross margins to widen over time. Our pro forma expectations are the result of the company's alteration of reporting. It is now including depreciation and amortization in direct costs and corporate selling, general, and administrative expenses. We think pro-forma SG&A expenses should decline as a percentage of revenue in 2005, benefiting from economies of scale. BETTER MARGINS. Despite increased interest expense on greater debt -- although at a lower cost of debt -- we forecast a net operating margin improvement of 20 basis points and EPS growth of 23% in 2004, to 74 cents, excluding charges. In 2005, we expect a 60-basis-point improvement in net margin and EPS growth of 22%, to 90 cents. Our Standard & Poor's Core EPS estimates are 73 cents for 2004 and 89 cents for 2005. For this year, our projection is adjusted for a gain from a legal settlement and the expected impact of stock options. Our estimate for 2005 is adjusted for the expected impact of stock options. Our 12-month target price for VCA of $29 is based on a blend of discounted free cash-flow (DCF) valuation and p-e-based metrics. Our DCF model forecasts 11% average annualized free cash-flow growth over 10 years with a terminal growth rate of 4%, and a weighted average cost of capital of 8.5%. Also, based on our view that the current debt-to-capital ratio is not likely to be maintained over the long term and is inappropriate for modeling purposes, our model assumes a target debt-to-capital ratio of 30%. Our DCF model finds intrinsic value for VCA shares at $31. HUGE UPSIDE. In our view, there is an absence of suitable peers within the company's niche business, so we have not employed an industry relative metric to value the shares. We believe the high end of the p-e ratio range VCA has attained over the recent past is appropriate for a stable growth stock with the company's growth potential. The shares trade at about 27.6 times VCA's trailing 12-month operating EPS of 71 cents. If we apply this multiple to our forward 12-month EPS estimate of 87 cents, we arrive at a value of $24. However, we believe the stock has been impacted recently by concerns over insider sales, a changing competitive environment, and the purchase of Sound Technologies. We believe VCA will recover following the solid operating performance we anticipate over the next 12 months, and view the multiple of 31 times our forward 12-month EPS estimate achieved earlier this year as reachable again. Applying that multiple to our forward 12-month EPS estimate, we calculate a price of $27. Blending our DCF-based value and our p-e-based metric, we derive our 12-month target price of $29, representing a nearly 50% appreciation opportunity over the coming year. Risks to our recommendation and target price, in our view, include possible failure to maintain growth levels matching the company's historical rates or meeting our three-year growth projection of 20%. VCA also faces acquisition-integration risks, especially with National PetCare Centers. If margin improvement of acquired operations does not meet our expectations, operating results could fall short of our estimates. DEBT'S SHADOW. If the synergies we expect from the acquisition of Sound Technologies do not materialize, or if the adoption of ultrasound and digital radiology as diagnostic tools for veterinarians is less than our estimate, earnings could be lower than our view. Any failure in its information-technology systems or disruption to its transportation network (including disruption resulting from terrorist activities) could significantly increase testing turnaround time, reduce production capacity, and otherwise disrupt operations. Other risks, in our view: Competition in the companion animal health-care services industry could cause VCA to reduce prices or lose market share. The company could experience difficulties hiring skilled veterinarians due to shortages that could disrupt its business. The company's substantial amount of debt, as well as the guarantees of its subsidiaries and the security interests in its assets and those of its subsidiaries, could impair VCA's ability to operate its business effectively -- and may limit its ability to take advantage of business opportunities. Failure to satisfy covenants in its debt instruments would cause a default under those instruments.
 Analyst Kaminis follows stocks of emerging growth companies for Standard & Poor's Equity Research Services All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc. Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
 Copyright 2004, Bloomberg L.P.Terms of Use | Privacy Notice |
Printer-Friendly Version
