Company Reports

We have upgraded our economic moat rating on Idexx to wide, after taking a fresh look at the firm’s intangible assets that have complemented switching costs in supporting highly attractive economic profits over the last two decades.

Idexx Laboratories has steadily increased its scale and reach in the veterinary diagnostic lab business to dig a wide moat. It is well-positioned to benefit from two key trends. First, pet ownership continues to grow, offering a secular tailwind since the late 1980s. Moreover, pet owners have demonstrated greater willingness to spend more on their animals, having more than tripled spending on pet products and services since 1994.

Idexx posted second-quarter results that were more muted than usual; we’re leaving our fair value estimate unchanged as our slight adjustments to full-year projections weren’t enough to move the needle. Even more unusual, management reduced its outlook for the second consecutive quarter. Nonetheless, we haven’t seen much to suggest that Idexx’s narrow economic moat has eroded. The firm’s switching costs and intangible assets appear intact.

Narrow-moat Idexx delivered soft first-quarter results that led management to adjust the outlook downward. However, our estimates remain bounded by the revised guidance, albeit on the high end of the range now, and we’re leaving our fair value estimate unchanged. Though the firm kept a tight rein on expenses, quarterly top-line growth of 7% slightly lagged the high-single-digit pace that Idexx usually delivers. Management indicated severe weather in the first quarter likely depressed revenue growth by 50 to 100 basis points. Nonetheless, even after adjusting for weather patterns, sales growth was still on the anemic side.

Idexx Laboratories has steadily increased its scale and reach in the veterinary diagnostic lab business to dig a narrow moat. It is well-positioned to benefit from two key trends. First, pet ownership continues to grow, offering a secular tailwind since the late 1980s. Moreover, pet owners have demonstrated greater willingness to spend more on their animals, having more than tripled spending on pet products and services since 1994.

Narrow-moat Idexx Labs posted fourth-quarter and full-year results that were generally consistent with our top and bottom line estimates, and our projections for 2024 remain within the bounds of management’s outlook. Though we haven’t altered our modeling assumptions, we do expect to modestly raise our fair value estimate to reflect the cash flow realized since our last update. Nevertheless, shares remain overvalued from our perspective.

Idexx Labs reported third-quarter results that generally put the firm on track to meet our full-year expectations, and we’re reiterating our $351 fair value estimate. Though the market may have been disappointed with quarterly top-line growth of 9%, our projections for 2023 remain bounded by management’s lower outlook. We saw little in the quarter to change our view of Idexx’s narrow economic moat, which is rooted in switching costs related to its installed base of benchtop analyzers in animal hospitals, as well as intangible assets including its high-touch service for vets. Nonetheless, there are some endogenous factors that have weighed on the larger animal health industry recently, and Idexx has not been immune.

Narrow-moat Idexx Labs reported a solid second-quarter performance, with the firm closely tracking our full-year projections. However, the minor adjustments we've made to our underlying assumptions weren't material enough to shift our fair value estimate. As usual, the companion animal segment led the way with 11% quarterly organic revenue growth, and the water division wasn't far behind with a 9% increase. Idexx did a nice job of keeping expenses under control, with quarterly operating margin coming in slightly above the 29% we've projected for the full year.

Idexx Labs posted first-quarter performance that featured significant pricing gains, and after tweaking our full-year projections to accommodate these changes, we’ve modestly raised our fair value estimate to $351 per share. The firm’s companion animal group returned to low-double-digit growth in constant currency in the first quarter, consistent with Idexx’s longer-term growth before the pandemic disrupted the pet market. We continue to believe that vet and animal hospital capacity remains constrained, but conditions appear to be improving just in time for the seasonal uptick in vet care that comes in the warmer months. There was little in the quarter to change our thinking on Idexx’s narrow economic moat.

Idexx Laboratories has steadily increased its scale and reach in the veterinary diagnostic lab business to dig a narrow moat. It is well-positioned to benefit from two key trends. First, pet ownership continues to grow, offering a secular tailwind since the late 1980s. Moreover, pet owners have demonstrated greater willingness to spend more on their animals, having more than tripled spending on pet products and services since 1994.

Idexx Laboratories has steadily increased its scale and reach in the veterinary diagnostic lab business to dig a narrow moat. It is well-positioned to benefit from two key trends. First, pet ownership continues to grow, offering a secular tailwind since the late 1980s. Moreover, pet owners have demonstrated greater willingness to spend more on their animals, having more than tripled spending on pet products and services since 1994.

Idexx reported full-year results that ran slightly ahead of our projections on the top and bottom lines, but this recent performance did not materially shift our fair value estimate. Nonetheless, management comments about capturing price gains in 2023 have spurred us to adjust our assumptions for profitability this year, which could drive a modest increase in our valuation. Even with this boost in our intrinsic value, shares have bounced back and are again significantly overvalued, from our perspective. The current share price implies average annual revenue growth of 14.2% through 2026, along with 430 basis points of operating margin improvement over the next four years. We’re skeptical that Idexx can hit those hurdles, especially considering the ongoing bottleneck in animal hospital labor—a factor that remains outside Idexx’s control. Despite shares trading at a premium, we remain enthusiastic about Idexx’s ability to innovate and provide high-touch service to animal hospitals—intangible assets that support Idexx’s narrow economic moat.

Idexx Labs saw solid results in the third quarter that featured strength in companion animal diagnostics as well as the smaller water segment. We made minor adjustments to our full-year projections to further reflect unfavorable foreign exchange, but these weren’t material enough to shift our fair value estimate. Coming off the pandemic-fueled boost in business in 2020 and 2021, Idexx is now shifting gears for growth that resembles that of the prepandemic days, albeit off a larger pool of pets. Shares remain overvalued, in our view. Thanks to inflationary conditions, Idexx has also rolled out price increases, and thus far doesn’t seem to have received much push back from vets. We view Idexx’s ability to flex its pricing upward as indicative of the firm’s narrow economic moat. The switching costs associated with its benchtop analyzers and practice management software, as well as intangible assets in the form of close relationships with vets, translate into pricing power for Idexx, from our perspective.

Idexx’s second quarter largely met our expectations, though we trimmed our assumptions for the full year as foreign exchange headwinds have gained strength since the beginning of 2022. However, our adjustments weren’t enough to shift our fair value estimate materially. Following the huge influx of pandemic pets in 2020 and through 2021, we’re now seeing demand moderate. Further, like other service industries, animal hospitals are wrestling with labor challenges that may be constraining capacity. We remain confident in Idexx’s narrow economic moat and are particularly pleased to see the adoption of practice-management software that enhances workflow, as well as the migration to cloud-based solutions. As we’ve seen in the traditional tech industry, these types of software solutions often come with high switching costs. For that reason, we think there’s potential for Idexx’s IT portfolio to solidify switching costs among its animal hospital clients.

Idexx Labs posted first-quarter results that were generally consistent with our expectations on the top and bottom lines. However, management lowered its full-year outlook, which prompted shares to fall 6%. After making some slight adjustments to our assumptions, we’re leaving our fair value estimate unchanged, and our projections remain on the high side of management’s new guidance. Nonetheless, Idexx shares have long been insanely overvalued, from our perspective, and we’re pleased to see shares come closer to earth. We remain confident in Idexx’s narrow economic moat, which is supported by cost advantage in its large reference lab business, intangible assets related to the firm’s relationships with veterinarians, and switching costs from its benchtop analyzers and practice management software. Despite the uncharacteristically slow growth in first quarter, we see nothing to suggest that there’s been any erosion in these competitive advantages.

Idexx Laboratories has steadily increased its scale and reach in the veterinary diagnostic lab business to dig a narrow moat. It is well-positioned to benefit from two key trends. First, pet ownership continues to grow, with an estimated 70% of U.S. households owning pets in 2021 compared with 56% in 1988. Moreover, pet owners have demonstrated greater willingness to spend more on their animals, having more than tripled spending on pet products and services since 1994.

Idexx Labs delivered double-digit top-line growth again and 9% earnings growth after adjusting for unusually low taxes in the prior-year period. We’ve made immaterial adjustments to our assumptions, as full-year revenue and earnings growth at 19% and 28%, respectively, were very close to our expectations. The high-flying shares have fallen roughly 20% off earlier highs last fall, but shares are still trading at a 70% premium to our intrinsic value. Most recently, we’ve been concerned with the possibility that a wave of the pandemic pets adopted during 2020 and 2021 would be returned to shelters once workers began returning to offices. However, there was little in the fourth-quarter results that indicate this is happening on a large scale. Further, consolidated animal shelter data also suggests that pet intake through the second half of 2021 remains lower than the typical prepandemic levels. All of this bodes well for narrow-moat Idexx.

Idexx Laboratories has steadily increased its scale and reach in the veterinary diagnostic lab business to dig a narrow moat. It is well-positioned to benefit from two key trends. First, pet ownership continues to grow, with 70% of U.S. households owning pets in 2021 compared with 56% in 1988. Moreover, pet owners have demonstrated greater willingness to spend more on their animals, having more than tripled spending on pet products and services since 1994.

Idexx Labs posted strong third-quarter results that were largely consistent with our expectations and leave the firm on track to meet our full-year projections; we’re standing pat on our $301 fair value estimate. Some investors may have been disappointed by the slowing year-over-year growth in the rapid assay and reference lab product lines. However, we think this fits into the shifting patterns spurred by the pandemic and the usual seasonality seen in Idexx’s companion animal business. On one hand, vet services typically peak in the second quarter during the warm weather months, but that period in 2020 was subject to lockdown orders that led to pent-up demand that was unleashed in third quarter, making for a challenging year-over-year comparison. On the other hand, we think 2021 is reverting to the more typical seasonality with vet services peaking in second quarter again, which led to a more muted third-quarter performance. Either way, we see little to change our view of Idexx’s narrow moat and continue to think it will be difficult for competitors to catch up to this front-runner.

Amid much media attention and anecdotal evidence suggesting widespread, significant growth in pet adoptions across the United States during the pandemic, we took a closer look and estimate there was a 13% net increase in dog adoptions in 2020 year over year, based on consolidated shelter data and American Kennel Club records. It is less clear what the rise in cat adoptions was, as there is simply less reliable data for cats. Nonetheless, we think this increase in adoptions, along with the extended period of intense pet bonding for new and existing pet owners during the pandemic, should support the robust increase in pet healthcare spending seen initially in 2020 to extend over the next eight to 10 years, reflecting the general lifespan of newly adopted pets. While we have dialed up our cash flow projections for narrow-moat Idexx Laboratories and wide-moat Zoetis, their share prices remain rich and imply wildly optimistic expectations.