Idexx Laboratories (NASDAQ: IDXX) is a juggernaut in the animal health industry. The $47-billion-market-cap company sells diagnostic equipment to veterinarians and analyzes animal lab results.
Idexx recently reported its earnings for the first quarter of 2021 and showed incredible progress due to the continued growth in the population of pets and the increased penetration of its products at veterinary clinics. Better yet, the company provided some exciting news on its future products that could further propel earnings growth for the business.
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Stellar financial results
Idexx started off 2021 on the right foot. Revenue growth for the quarter was 24% year over year, driven by its sales of diagnostic equipment, tests, and other products to the veterinary market.
Several trends have supported Idexx's sales. To start, the total number of pets has been growing over the years. Many people adopted pets during the COVID-19 pandemic which led to an acceleration of this growth trend. One estimate from Packaged Facts indicates that the number of U.S. households that own pets increased by 4% in 2020 to around 71 million households. And of course, more pets means more visits to veterinarians.
Additionally, veterinarians have been steadily increasing the frequency of diagnostic testing. This trend was highlighted throughout the pandemic, when clinics had to focus on essential pet services. For example, Idexx noted during its Q1 2021 earnings call that increased utilization of diagnostics supported a 15% increase in same-store veterinary clinic revenue and a 21% increase in same-store diagnostic revenue per practice. This increase is far greater than the estimated 5% growth in overall visits to veterinary clinics seen in the same period.
During the quarter, Idexx's revenue grew 24%, while operating expenses grew only 4%, resulting in significant margin expansion. However, management pointed out that operating margins will likely decrease throughout the year as the company invests more capital in supporting growth. The company ended the quarter with 82% growth in earnings per share, an incredible testament to the company's abilities to grow earnings as it expands its reach through diagnostics placements and improves its recurring revenue base.
Introducing the ProCyte One
Management also provided updates on the company's new veterinary diagnostic analyzer, the ProCyte One. The ProCyte One is an advanced blood analyzer that delivers fast and accurate test results. This instrument provides a comprehensive portfolio of tests, including 24 whole blood parameters that give insights to a pet's health.
The ProCyte One is marketed through an incredibly smart sales model. Instead of paying a considerable up-front capital expense, clinics can order a new ProCyte One online with their Idexx account at no upfront cost in exchange for testing volume commitments, through which the veterinarian pays per use. This is a win-win for Idexx and the veterinary clinics, because it aligns cost with usage and reduces the friction that comes with selling new equipment to a clinic. Idexx has started to roll out the ProCyte One to clinics in North America and soon it will ship the analyzers internationally. Idexx expects to place over 100,000 units at the ProCyte One's peak.
This analyzer also provides a multiplier effect because clinics almost always run hematology tests with chemistry tests, so new clinics that join with Idexx are likely to integrate with other pieces of Idexx equipment. This should help Idexx cross-sell its complete portfolio of lab equipment and solutions to a new cohort of users as well as increase revenue from existing customers.
A bright and furry future
Idexx has given investors much to look forward to as the company continues to execute its long-term strategy. The company's core business is growing at a healthy rate and new offerings like the ProCyte One will keep Idexx ahead of its competitors.
As for Idexx's stock, the only sticking point is valuation. Idexx currently trades for 70 times its trailing earnings per share -- extremely high even for a high-caliber healthcare business. It may pay to be patient; if Idexx's stock price ever meaningfully corrects, the stock may be worth some serious consideration.
