Rare Chance to Pounce: One Exceptional S&P 500 Title Drops 40% Post-Retraction, Ideal for Purchase
The ongoing argument over whether to invest in high-quality or high-growth businesses will never reach a conclusion. The simplest solution, however, is to find stocks that offer both.
A company that fits this 'best-of-both-worlds' description is IDEXX Laboratories (IDXX -0.97%), renowned for its leading pet healthcare diagnostic operations. Over the past decade, the company has recorded annualized revenue and free-cash-flow growth of 10% and 25% respectively. Its 'razor-and-blade' business model has transformed it into a consistent compounder.
IDEXX Labs provides a variety of solutions that contribute to pet health and happiness, including point-of-care diagnostic equipment, rapid assay tests, reference lab guidance, consulting services, and veterinary software. This array of offerings has made IDEXX a leader in the $45 billion pet healthcare diagnostics sector.
Following a pandemic-induced boom in pet adoptions, IDEXX has struggled to maintain its double-digit growth rate, posting 7% growth in its latest quarter. Consequently, IDEXX's share price has plummeted by 40% since its 2021 all-time highs.
However, better times may be on the horizon. With shares now trading at their most reasonable valuation in nearly a decade, here are four reasons why IDEXX is one of the most attractive S&P 500 stocks to buy at present.
1. The enduring pet healthcare sector
Generally, the pet care industry exhibits the same resilience as any other, except for pandemic-fueled growth spikes and declines. In a 2024 survey, only 4% of pet owners admitted to delaying a vet visit due to illness, whereas 21% postponed a vacation, and 44% reduced their dining-out expenses.
This trend isn't a short-term phenomenon. Over the past decade, the average life span of dogs and cats has increased by 1.4 and 1.9 years, respectively, underscoring the growing bond between humans and their pets. Younger millennial and Gen Z pet owners are particularly committed, with a higher propensity to schedule annual pet health check-ups.
Fueled by this long-term trend, Future Market Insights anticipates the vet diagnostics market will grow by 10% annually until 2034, while IDEXX itself projects a 9% expansion rate by 2048.
2. IDEXX's 'razor-and-blade' business model
Besides operating in a resilient market, IDEXX's 'razor-and-blade' business model offers additional security for investors. IDEXX boasts an installed base of over 144,000 diagnostic devices -- a 10% increase from last year -- giving it a global footprint.
Management asserts that there's potential to double these placements in the long term as they focus on expanding into international markets.
What sets these instruments apart is their ability to drive IDEXX's performance through recurring sales from veterinary lab consumables, reference lab diagnostics, and consulting services. These high-margin, recurring revenue streams contribute to 80% of IDEXX's overall sales, ensuring the company's stability.
3. Expanding growth prospects
Beyond its existing operations, IDEXX's forays into oncology and software could spark new growth waves. By building upon its current cytology, hematology, and urine analysis solutions, among others, IDEXX plans to launch a line of oncology products in Q4 2024 and 2025.
Management projects that they'll be able to augment their panel to detect over 50% of canine cancer cases by 2025, enabling earlier detection and better treatment options.
Besides this promising growth area, IDEXX is developing its comprehensive suite of veterinary software, encompassing features from pet-owner engagement to payments and digital workflows at vet offices. Already boasting an impressive customer satisfaction score, the company's software solutions have grown by 15% annually since 2019, with recurring revenue in this segment growing even faster, at 23%.
4. IDEXX's once-in-a-decade valuation
Although IDEXX isn't trading at a traditionally low valuation, at 42 times free cash flow (FCF), its current price-to-FCF ratio is its lowest since 2016.
While this valuation remains a premium over the S&P 500's average P/FCF of around 32, I'd argue that IDEXX and its 'razor-and-blade' model, dynamic industry, and growth possibilities make it one of the better picks in the index and worthy of this valuation.
With a ROIC of 38% -- the 19th highest in the S&P 500, an indicator of strong outperformance potential -- IDEXX appears to be an enticing buy-in after its recent 40% slide.
After considering the resilient pet healthcare sector and IDEXX Labs' 'razor-and-blade' business model, some investors might find it appealing to allocate their finance towards purchasing shares of IDEXX. The company's strategic focus on expanding into international markets and its oncology and software divisions offers promising growth prospects, making it an attractive investment opportunity in the S&P 500. With its current valuation at its lowest since 2016, and strong financial performance indicators, IDEXX could be a valuable addition to an investing portfolio focused on both growth and stability.
