What we think about IDEXX Laboratories (IDXX)
IDEXX Laboratories in Three Words: Pet Diagnostic Machinery
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Background
IDEXX Labs is a global leader in veterinary diagnostic care, providing the machines that test for why your puppy is sick and what recommended medications he should take. Its Catalyst, ProCyte, and SediVue product lines have been placed in more than 100,00 vet clinics globally and could eventually reach 300,000 locations through international expansion.
IDEXX is a “razor and blades” business — where the upfront “razor” machine sales then lead to the continued sale of ongoing diagnostic tests as the “blades”. This is an extremely profitable model, with IDEXX recently reporting 9% revenue growth, 18% earnings per share growth, a 30% operating margin, and an incredible 44% return on invested capital. The company has used its profits to buy back shares – reducing its share count by more than 45% since it began its repurchase program 1999.
With 22% market share in North America, IDEXX is now expanding internationally, specifically in Europe (where it currently has 8% share), Asia (9% share), and Latin America (2%). If the company can replicate its domestic success on other continents — where insurance coverage for companion animals is more prevalent and it’s common to do bloodwork in vet appointments – it could support its stated goals of 10%+ annual growth in revenue and in earnings per share.
IDEXX reported 9% revenue growth and 13% earnings per share growth in its fourth quarter results. Even more impressively, its operating margin expanded 400 basis points year-over-year to 30.6% due to conservative spending on R&D and it generated a 21% free cash flow margin during 2023.
IDEXX is a niche market leader with an incredibly high return on invested capital. Shares look pretty expensive (currently 27x earnings), but the consistency of its growth in fundamentals is what makes it so appealing as man’s best friend for risk-averse investors looking for an international growth opportunity.
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