Dear Mr. Berko:
Please tell me what you think of VCA Antech Inc., which sells for $21 a share. A couple of folks we know have had good results with a VCA clinic.
S.A., Wilmington, N.C.
VCA Antech Inc. (WOOF-$23.90) was known as Veterinary Centers of America before it changed its name a dozen years ago. I first heard about WOOF in November 2001, when a reader from Cincinnati asked whether she should participate in a Credit Suisse Group initial public offering and buy the stock at $5. I told her something like “I think it’s a good shot” or “I don’t think you could get hurt.” So she purchased 3,000 shares (1,000 shares for each of her kids) and, a few days afterward, sold the shares at $11. Three years later, she sent an email busting my chops: “You were too dumb to advise me to hold the stock for the long haul,” she wrote. That email could have knocked me over with a fender! Back in those days, WOOF was a dinky $345 million-revenue health care provider for emus, potbellied pigs, pythons, monkeys, hamsters, rabbits and the like. This year, WOOF’s 10,000 employees (including 1,800 veterinarians), working from 600 animal hospitals and 55 diagnostic centers in 70 cities, will generate $1.8 billion in revenues. Those revenues will produce net income of $125 million, or $1.45 per share. This is the largest animal health care provider in the U.S.
WOOF derives 77 percent of revenues from its animal hospitals, 18 percent from clinical and laboratory services it provides to 15,000 small-animal hospitals nationwide and 5 percent from the sale of imaging equipment and medical technology. WOOF’s animal hospitals are more efficient than most American hospitals, and the quality of care in too many cases is comparable. I’ve had experiences with hospitals in India, Pakistan, Nepal, Sikkim, Bhutan, Russia and a few Caribbean nations. And on the whole, I’d prefer a WOOF clinic.
WOOF has a strong balance sheet: Debt is 33 percent of capital; the book value has grown eightfold since 2003; and working capital is more than $15 a share. However, the income statement has had a few problems in the past decade. Operating margins have declined 40 percent, and net profit margins have fallen 30 percent, though per-share earnings have tripled and may continue modestly higher.
I’m concerned that WOOF’s return on total capital and shareholders’ equity have fallen significantly in the past decade, and I think it’s time management gave something back to shareholders, such as a dividend or initiating a share buyback program. The fact that Vanguard, Lord Abbett & Co., Fidelity and State Street own sizable interests suggests that revenues and earnings will continue to ratchet higher.
However, Stifel Nicolaus, a classy brokerage out of St. Louis, recently issued a “sell” recommendation. I believe that WOOF, at 16 times earnings, is fairly priced and that the share price probably will mirror the market over the coming years. I think that brothers and co-founders Robert and Arthur Antin need to spend more time watching corporate costs and less time playing golf. An analyst with Fidelity thinks that “the Antins are becoming long in the tooth” and that WOOF needs fresher and more aggressive blood. My guy at Fidelity doesn’t personally own the stock but brags about the money his family spends on pet care. He thinks WOOF could be a $33-$36 stock in the coming five years.
I recall that a few years back, WOOF was trading in the high $40s. At that time, California unions (WOOF is domiciled in Los Angeles) almost persuaded employers to include pet health care insurance in their employee benefit plans. When California’s unions succeed in adding this benefit to employee plans, the stock could take off like a missile. Rep. Nancy Pelosi, D-Calif., and the Antins are close, and Ms. Nancy may introduce enabling legislation in 2014.