Idaho-based distributor of animal health products, MWI Veterinary Supply, Inc. (MWIV) reported fourth-quarter fiscal 2014 earnings per share (EPS) of $1.36, up a robust 21.4% year over year. Earnings also beat the Zacks Consensus Estimate of $1.33 by 2.3%. The earnings improvement came on the back of solid double-digit top-line growth, coupled with an impressive rise in gross profit.
During the reported quarter, MWI Veterinary experienced a significant decline in its beta-agonist products sales due to the manufacturer's voluntary suspension of this product, which negatively affected its Micro business. This, probably, prevented the positive earnings results from boosting investors' confidence in this stock. Evidently, the company's share price has declined 8.7% since the announcement of fourth-quarter results to close at $155.00 yesterday.
For fiscal 2014, MWI Veterinary reported net income of $72 million or $5.65 per share, representing an improvement of 14.5% or 14.1%, respectively from the year-ago equivalent of $62.8 million or $4.95 per share.
Revenues in Detail
Fourth-quarter revenues (including the impact of the IVESCO Holdings acquisition closed on Nov 1, 2013) increased 31.2% year over year to $794.1 million, outpacing the Zacks Consensus Estimate of $758 million by a solid 4.8%. Revenue growth in both the U.S. and U.K. regions accounted for the overall year-over-growth in the fourth quarter.
Revenue growth in the U.S. was 33.6% on a year-over-year basis owing to IVESCO acquisition-related growth as well as organic revenue improvement. Of this, 1.7% came from flea, tick and heartworm products. Also, diagnostic lines benefited U.S. revenues by contributing 1.2% of the sales growth.
During the fourth quarter, the company's Internet sales to independent veterinary practices and producers rose 24%, while revenues from its veterinary pharmacy programs in the U.S. increased 27% to $75.5 million. Moreover, management estimated organic revenue growth in the U.S. at about 9% for the quarter and at approximately 11% after excluding the net effect of beta-agonist sales (which reduced in the reported quarter).
On the other hand, revenues from the U.K. increased 15% year over year, of which foreign currency translation was responsible for 8.4% growth.
However, the company's Micro business was adversely impacted by the recall of a number of beta-agonist products in Sep 2013. The suspended product was cannibalized by a more competitive product that sells for about half of the price of the former. According to the company, however, both products have similar growth margins.
In fiscal 2014, MWI Veterinary's revenues increased 27% year over year to $2.98 million, driven by revenue growth in the U.S. and U.K.
Operational Update
Gross profit improved 24.6% to $93.7 million in the quarter. However, gross margin contracted 60 basis points (bps) year over year to 11.8% in the quarter due to the addition of the low-margin IVESCO business in Nov 2013 and owing to the lower rebates rendered by vendors as a percentage of sales.
Despite the 23.1% hike in selling, general and administrative (SG&A) expenses to $61.8 million, MWI Veterinary's adjusted operating income (excluding depreciation and amortization) climbed 27.5% to $31.9 million. The increase in SG&A expenses was induced primarily by the addition of the IVESCO business and costs associated with the integration process. However, adjusted operating margin contracted slightly by 10 bps to 4% in the quarter.
Financial Update
MWI Veterinary exited the reported quarter with cash balance of $3.85 million compared with nearly $1 million at the end of fiscal 2013.
On Sep 2, 2014, MWI Veterinary acquired Vetspace Limited – a provider of practice management software to veterinary practices, principally in the U.K. – and certain of its affiliates. MWI Veterinary believes this acquisition will expand value-added service offerings for its customers and support its growth strategy to offer innovative, differentiated solutions to veterinarians. Financial terms of the transaction were not disclosed.
Guidance
For fiscal 2015, MWI Veterinary expects its revenues to lie in the range of $3.19–$3.28 billion, reflecting annualized growth of 7%–10%. The current Zacks Consensus Estimate of $3.24 billion falls within the guidance range.
Moreover, the company expects fiscal 2015 EPS in the band of $6.10–$6.28, representing annualized growth of 8%–11%. The current Zacks Consensus Estimate of $6.24 also lies within the company's guided range.
Our Take
MWI Veterinary reported an impressive fiscal fourth quarter with both revenues and earnings beating the Zacks Consensus Estimate. Moreover, the quarter's performance reflected a solid improvement over the prior-year period's numbers. However, management has expressed concern regarding declining vendor rebates, which it expects to adversely affect EPS in the first quarter of fiscal 2015. However, MWI Veterinary is focused on sorting out the matter with its vendor partners, so as to be able to convince more customers to buy the company's products. This should induce more sales and in turn might help raise vendor rebates.
Zack Rank
Currently, the stock carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the medical/dental supplies industry include AmerisourceBergen Corporation (ABC), CR Bard Inc. (BCR) and Bio-Reference Laboratories Inc. (BRLI). All the three stocks carry a Zacks Rank #2 (Buy).
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