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Recession-Resistant Veterinary Supply Company Grows

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Americans’ love affair with their pets didn’t fade in the recession, keeping the animal health care industry in better shape than a lot of others.

But pet health care isn’t recession-proof, says Jim Cleary, chief executive of MWI Veterinary Supply (MWIV): “It’s recession-resistant.”

MWI, based in Meridian, Idaho, is one of the biggest wholesale distributors of animal health products in the U.S.

It sells tens of thousands of products, many of them pharmaceuticals and vaccines.

“Categories like capital equipment used by veterinarian clinics have been impacted by the economy,” Cleary said, “but core pharmaceutical and vaccine purchases have been less impacted.”

Only 3% of MWI’s revenue comes from capital equipment.

The firm’s overall revenue grew 14% in the first nine months of its fiscal year, which began last October, right after stock markets plunged.

MWI’s shares, which had traded as high as 45 in September, fell to as low as 20 by late November. They’re now trading around 39.

The stock rose 5% on July 30, the day MWI reported an 18.8% jump in third-quarter revenue from the year-ago period to $247.5 million. Earnings rose 23% to 54 cents a share, beating Wall Street views.

Raising Guidance

Management raised revenue guidance for the full fiscal year ending in September to $940 million, up from between $910 million and $925 million earlier.

It also lifted full-year profit estimates to $1.93 a share from an earlier range of $1.80 to $1.85.

Analysts expect a profit of $1.94, according to a Thomson Reuters poll, meaning a 20% gain vs. last year. They see an 11% rise next year.

About two-thirds of MWI’s revenue comes from sales to vets treating pets.

The other third derives from vet products for production animals such as dairy cows, a business affected more by the economy and the commodities markets. Milk prices, for example, have fallen sharply.

“Dairy cow numbers are down,” Cleary said. And vets “will cut back on purchases when they are able to.”

Since the end of last September, MWI has upped its allowance for doubtful accounts by $1.5 million.

Dairy producers aren’t the only ones cutting back. Pfizer (PFE), one of MWI’s largest suppliers, cut its livestock rebates in January, according to a JPMorgan client note. The move was one of the reasons MWI’s gross margin fell to 13.8% from 14.6% the previous year.

On the other hand, the company benefited from lower freight costs. It’s been reducing air shipments in favor of ground shipments, and controlling other expenses.

MWI’s animal-production side of the business still grew, though not as much as the pet side.

“We’ve seen our company continue to gain share in the food animal market,” Cleary said.

Cleary puts MWI’s overall market share in the $7 billion animal health industry at 16% to 20%.

It’s a highly fragmented market. MWI is one of the top three suppliers in most markets. It leads in Western states.

Its chief rivals in the pet business are Butler Animal Health Supply and Webster Veterinary, a unit of Patterson Cos. (PDCO) In livestock, rivals include Animal Health International (AHII) and Lextron.

“MWI is the only major veterinary distributor with a strong presence in both the companion animal and production animal segments,” CL King analyst Ross Taylor wrote in an Aug. 17 report.

That allows it to achieve high market share in mixed vet practices and to leverage higher volumes through its fixed-asset base, Taylor said.

Analysts see more gains ahead as the firm signs on new customers for its “value-added services” such as home delivery and online ordering.

Shipping products directly to customers on behalf of vets has helped MWI’s production animal business grow despite the weak industry environment, Taylor said.

In pet services, the Banfield animal hospital chain has agreed to let MWI handle home delivery services on its behalf. With more than 730 pet hospitals, Portland, Ore.-based Banfield is already MWI’s largest customer, accounting for 11% of sales.

“Our business to Banfield hospitals has been growing at a nice pace,” Cleary said.

The number of MWI’s sales reps has been steadily growing, even during the recession. As of June 30, the total was 324, including 137 tele-marketing reps.

“We project MWI will continue to increase its market share gradually as it increases its revenue with existing customers and adds new customers,” Taylor wrote.

MWI is trying especially hard to grow sales in the East and Midwest, regions where it has less business than in the West.

It will soon open a new distribution center in Indianapolis to serve Midwestern and Great Lakes states.

Meanwhile, sales on the company’s e-commerce platform keep growing. Sales to independent vets grew by 47% in the last quarter vs. the year-earlier quarter.

In the last quarter, Internet sales made up 32% of revenue, up from 28% in the year-ago period.

“Technology is changing the veterinary distribution industry,” Taylor wrote. “MWI’s e-commerce system provides easy-to-use online ordering capabilities and is one of its most significant services offerings.”

He noted that 4,900 of MWI’s 19,000 customers placed online orders in the March quarter, suggesting to him that the e-commerce platform “still has significant untapped potential.”

Looking For Acquisitions

Another way the company plans to grow is through select acquisitions of small wholesale distributors, preferably in the pet market.

“We do think there will be an acquisition possibility in 2010,” Cleary said.

MWI’s last purchase, of AAHA MarketLink in July 2008, came with about 1,300 accounts and added about $10 million in new quarterly revenue, Cleary said.

A distributor for member clinics of the American Animal Hospital Association, AAHA MarketLink came with a strong reputation and brand name within the vet community.

“AAHA MarketLink should strengthen MWI’s image and presence in the Northeast, where the company has low market share,” Taylor said in his report.

Moreover, business in general should accelerate when the economy improves, he said.

Investor’s Business Daily Inc.

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