For most of the last decade, IDEXX has had a high correlation to the biotech sector. Over the last year, it has trounced the sector's 12% return. There have been several factors contributing to IDEXX's performance. First, it has a very steady and predictable business. IDEXX has a healthy track record of exceeding earnings estimates. It has also benefited from renewed interest in the entire biotech group. Lastly, its revenue growth of 15% is slightly above the industry average.
The thing that makes IDEXX unique is that it doesn't work on blockbuster, make-or-break-the-company types of drugs. Its most recent interaction with the Food and Drug Administration was approval of an anti-inflammatory cream for horses. IDEXX does not set out to hit home runs; it's happy with singles and walks. This has served to reduce the stock's volatility.
The cost of all these pluses is a stock that trades at a high multiple to everything (sales, earnings, and book value) and has no dividend. While none of the numbers are high compared with the rest of the sector, it is worth noting that the stock is not cheap and the earnings growth is only expected to be 11.9% from 2004 to 2005.
So where does this leave us with IDEXX? If you can't get over the high price-to-sales, price-to-earnings, and price-to-book value ratios, you should stay away, because I do think the stock is priced for perfection. A huge miss in the company's earnings could hit the stock hard.
One interesting cushion that should protect shareholders on the down side is that the stock is 94% institutionally held. Most of that is index money. IDEXX, with its $2.3 billion market cap, is a member of Standard & Poor's SmallCap 600 Index. It is the fourth-largest holding in the iShares S&P SmallCap 600 exchange-traded fund, and is in at least two other ETFs. IDEXX is also a holding in dozens of open-end mutual funds indexed to the S&P 600. These are shares that are unlikely to be sold anytime soon.
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Fool contributor Roger Nusbaum is an investment manager and wildland firefighter in Prescott, Ariz. At press time, neither he nor his clients owned any of the stocks mentioned.