MWI Veterinary Supply’s (MWIV) second quarter 2012 EPS came in at $1.04, surpassing the Zacks Consensus Estimate of 96 cents and increased 25.3% year over year. The company reported a robust 38.2% increase in revenues to $507.2 million, which comfortably surpassed the Zacks Consensus Estimate of $465 million. 

Excluding the acquisition of Micro Beef Technologies, the company's revenue grew 22.9% in the U.S. Revenues from Micro Beef acquisition were $63.0 million for the quarter. In the UK, revenue increased 11.6% year over year, including 13.7% organic growth, partially offset by a 2.1% decline related to foreign exchange. Commissions declined 21.6% year over year at $4.4 million, negatively impacted by the loss of a pet food line in fiscal 2012 that was earlier represented in fiscal 2011 along with a shift in commission terms for some parasiticides.

In the reported quarter, Internet sales to independent veterinary practices and producers in the US rose 37% year over year. Veterinary pharmacy programs revenues increased roughly 46% to $46.6 million.

Gross profit increased 30.7% to $66.6 million during the quarter. However, gross margin contracted 80 basis points (bps) year over year to 13.1%. The decline was due to lower product margins, decrease in vendor rebates and commissions as a percentage of total revenue.

In the reported quarter, MWI Vet’s operating income increased 26.9% to $21.4 million. However, with a 32.2% rise in selling, general and administrative (SG&A) expenses to $42.9 million, operating margin dipped 37 bps to 4.67% during the quarter.

MWIV exited the quarter with cash balance of $512,000 compared with $606,000 at the end of fiscal 2011. On March 31, 2012, the company had $64.5 million on its credit facilities compared with $61.6 million at the end of September 30, 2011. The increase in outstanding on credit facility was primarily the result of the acquisition of Micro Beef  assets and use of credit facility to fund working capital for revenue growth and strategic inventory purchases.

Outlook

MWIV raised its guidance for fiscal 2012. The company expects to report revenues of $2.0–$2.025 billion (earlier guidance was $1.90–$1.95 billion), representing annualized growth of 28−29% (21−25%). The company also expects the 2012 EPS to be in the range of $3.96– $4.06 ($3.85– $4.00) with annualized growth of 16−19% (13−18%). The current Zacks Consensus Estimates of $1.93 billion in revenues and $3.98 in EPS for fiscal 2012 are within the company’s guidance.

Our Take

We are encouraged with MWI Vet’s second quarter result, guidance revision with the growth momentum maintained by the company over the past few years. The company, which is one of the leading distributors of animal health products to veterinarians across the US, has acquired many companies to either expand its presence in areas where it has low market share or for increasing its focus in new areas. Besides, the company has witnessed substantial market share gain amidst a low-growth environment. However, the company faces stiff competition from key players like Henry Schein (HSIC) and Animal Health International.

Presently MWIV retains a short-term Zacks#2 Rank (Buy). However, over the long term, we have a ‘Neutral’ recommendation on the stock.