Ms. Brock: My coverage universe is currently focused on the specialty health care services space, including some of the outsourcing companies, specifically MEDNAX and Emergency Medical Services; ground ambulance transportation, which also includes EMS as the largest national ambulance provider and Rural/Metro, the second-largest operator; Hanger Orthopedic, which is the largest provider of orthotics and prosthetics; and then our focus today, which is animal health care, with coverage of IDEXX and VCA Antech. Previously, I also covered the hospitals, post-acute providers, clinical labs, dialysis, behavioral health care, hospice, ambulatory surgery centers and health care staffing as well.
TWST: What's your overall outlook for the veterinary or animal-oriented health care service companies?
Ms. Brock: I'm glad you asked it that way, as there is a very big difference between vet spending, which focuses on clinical care, and pet spending, which tracks everything else - food sales, grooming and other ancillaries, such as supplies, toys, clothes - and correlates much more closely with consumer sentiment. It is the veterinary spending trends that impact VCA and IDEXX, and interestingly, as the two largest players in the space, I would argue that they impact the trends as well. The short answer to your question is that I think these companies are very well positioned to grow in the medium to long term, based on a stable demand base. Despite the fact that the space has typically been associated with discretionary spending, which has clearly been under intense pressure over the last two-plus years, veterinary spending growth far exceeded U.S. GDP in both 2008 and 2009, continuing an historical pattern that you can trace back 50 years using government statistics.
Even more impressive was the fact that the relative resistance to economic downturns we have seen in the past held up in such a severe downturn. I believe the main reason for this is the fact that the highest utilizers of animal health care products and services, or pet owners who have prioritized health care for their pets, continued to provide a base of demand and essentially supported growth in the low single digits. I think this surprised a lot of investors. Even more so in the second half of 2009 - we started to see some strong signs of at least the beginning stages of recovery in the publicly traded companies versus just the industry stats. And in the first quarter of 2010, results for both IDEXX and VCA appear to support this trend. In my mind, the key is that organic volume appears to be stabilizing. Neither of the companies experienced pressure, so to speak, on the pricing front over the last couple of years, and I think the reason for that is just the fact that the price points are generally quite low and a 2% to 5% increase is optically negligible to the consumer.
So it was really the volume side where you saw a pullback, and it was across the board. Overall visits were down, and not surprisingly this drove declines in procedures and testing. As I look out today near term, specifically looking at the second quarter of 2010, I think the combination of slightly stronger consumer sentiment and seasonal strength driven by heartworm testing and the warmer weather will likely bring back to market some of the pet owners who have delayed basic services, such as testing for heartworm, over the past few years. While I talked about that core base of pet owners who prioritize health care, on the flip side, there is also a much larger pet owner population who have delayed care. And now that you have a slightly stronger economy, a slightly more constructive consumer sentiment, I think some of these owners could be feeling a little bit better and may actually say, "Okay, it's been two to three years since I took Fido to the vet, maybe it's time."
Tickers included in this excerpt: EMS, HGR, IDXX, MD, RURL, WOOF
For more information call (212) 952 7433. The Wall Street Transcript does not endorse any of the comments made by interviewees, and does not make stock recommendations.