"The average dog is a nicer person than the average person." -- Andy Rooney
Veterinary care provider VCA Antech (NASDAQ:WOOF) was no junkyard dog in the first quarter, as total reported revenue grew nearly 30% to just under $187 million. The reported figure includes the Sound Technologies business that it purchased in late 2004, but stripping that out still leaves revenue growth at a hearty 26.3%. For the quarter, net income grew by a similar 26.6%.
VCA Antech's lab business (less than 30% of the total) grew about 10% in the quarter. Gross profit in the lab division grew even faster, at 11%, and gross margin for the period improved to 44.7%.
In the company's main animal hospital business, consolidated revenue grew more than 36% on the back of a 7.3% increase in "same-store sales" and the net addition of five hospitals. Gross profit in the hospital business climbed by more than 42% and brought the gross margin up to 19.3% for the quarter -- meaningfully better on an annual and sequential basis. This improvement is due at least in part to a favorable change in revenue mix, as sales of low-margin goods, such as food, decline in significance to higher-margin procedures.
The company offers only abbreviated balance sheet and cash flow information, but we can see that operating cash flow grew 20% in the first quarter. Free cash flow growth came in lower (about 8%), though, as capital expenditures increased.
Management raised guidance for the rest of the year, and while that's good news, the better news is that the company is at work on a debt refinancing. VCA Antech announced about a week ago that is looking to replace its current debt arrangement in a way that would allow it to pay off its senior notes and senior subordinated notes (which carry a hefty 9.875% coupon). Given that debt is a considerable part of VCA Antech's financial structure, any meaningful reduction in interest expense should help boost earnings and cash flow.
VCA Antech isn't the only game in town -- local vets are still competitive, and PETsMART (NASDAQ:PETM) continues to support the rollout of Banfield Pet Hospital locations in their stores. But the market is strong and growing. New tests and drugs continue to become available to the veterinary market, and people seem increasingly willing to spend considerable amounts on their pets' health.
That said, investors looking to buy these shares aren't uncovering some bone that's been buried in the back yard and forgotten. The trailing P/E and EV-to-FCF ratios are both robust, and institutions already own a large chunk of stock.
But that's often also the price of success and growth. As I previously mentioned, VCA Antech is a growing consolidator in a growing market that is largely insensitive to economic cycles. Long-term investors will likely see themselves well rewarded over time, but they shouldn't kid themselves about the risks that a high-debt, high-valuation situation presents.
For more on the intersection of pets and profits:
- A Stock With Bark and Bite
- Will Pets Juice Rayovac?
- PETsMART Won't "Stay"
- Will VCA Antech Go to the Dogs?
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares). While he doesn't patronize a VCA Antech-owned facility, his six ferrets have taught him more than he cares to know about the pricing structure of veterinary care.
