IDEXX Laboratories, Inc. (IDXX): Strong Defensive Growth Prospects Here

And if anyone is in any doubt as to how highly rated the sector is right now then consider the surge in Zoetis Inc (NYSE:ZTS)

after the recent IPO. It was oversubscribed by as much as 20x according to sources, and as a Pfizer Inc. (NYSE:PFE)stockholder I consider that they sold it too cheaply. Zoetis has significant exposure to both companion and livestock markets.

Hospital Visits and Lab Revenues

While point of care diagnostics represents the growth platform at IDXX, the larger part of its revenues come from reference laboratory diagnostic and consulting services. The way to think of these revenues is as being a function of practice visits and revenues. The evidence is that people do hold back on taking pets to the vet in difficult times so there is an element of cyclicality here.

I’ve graphed IDXX’s estimates for these key metrics in 2012:

It looks like a sequential decline, but the company stated that Q4 growth was impacted by Sandy. Otherwise, it suggested patient visit growth would likely have been closer to 3.5%. This is not indicative of a strongly growing economy, but the US economy looks better in 2013 and IDXX is expecting key contributions from international expansion. With that said, organic growth in reference labs was an impressive 7.6% with a further 3.1% coming from acquisitions. IDXX can expand profits even with low single digit growth in patient visits.

Key Demographic Trends

All of these growth drivers are impressive, but to buy the stock you will need a lot of confidence in its abilities to meet its numbers, and this will depend on an assessment of its demographic drivers. I think they are very positive. An increasingly aging demographic implies more pet ownership, and with the incredible increases in divorce rates prevalent in the US it is self evidently true that there will be more single people at an age where they have disposable income. Moreover, birth rates remain low by historic standards. All of this is pointing towards the ongoing supplanting of the lack of children and a partner by buying a companion animal.

We can all disagree on the causes of this (for me it is feminism mainly), but the trends in society are clear and I don’t think they are going away anytime soon.

Where Next for Idexx?

Putting all of this together leads to analysts modeling Idexx with an accelerating free cash flow conversion rate in the future as consumables revenues grow with a high degree of confidence in its prospects for hitting these targets. All of which is wonderful, but it still leaves me uncomfortable with a stock on a forward PE of nearly 27x.

There are probably better ways to invest in the sector and, trust me, I am looking for them.

The article Strong Defensive Growth Prospects Here originally appeared on Fool.com and is written by Lee Samaha.

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