VCA Antech Inc (WOOF), a provider of veterinary services and diagnostic testing, holds a significant amount of earnings leverage in its business model should the U.S. economy improve, says Nicholas Jansen, Analyst at Raymond James & Associates, Inc.
“[VCA Antech] had mid- to high single-digit comps prerecession, and today their comps are low to mid-single-digit…if you believe the economy is going to continue to improve, therefore their comps would continue to improve; there is a significant amount of earnings leverage as margins go from negative to neutral to positive, which should yield significant earnings growth over the next two years to three years if that transpires,” Jansen said.
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With WOOF also generating a decent amount of free cash flow, Jansen sees opportunities for the company to buy animal hospitals or employ other strategies attractive to shareholders.
“They do generate a fair amount of free cash flow that they can utilize to either buy animal hospitals or perhaps be more shareholder-friendly capital deployment strategy, such as a share repurchase program, which they announced alongside their 1Q earnings report. So I think that’s a name that’s interesting to monitor if you’re bullish on the economic recovery story of the consumer,” Jansen said.
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