MWI shares sink despite better-than-expected earnings

MWI Veterinary Supply ($MWIV) announced Thursday that its revenues in its fourth fiscal quarter skyrocketed 31% year over year to $794 million, and its operating income jumped 28% to nearly $29 million. Its earnings per share of $1.36 for the quarter handily beat Street expectations of $1.33.

So why did MWI's shares trade down 10% to $152.51 following the earnings report?

The problem was the company's muted expectations for next year. MWI, based in Boise, Idaho, distributes medicines, diagnostic equipment, and nutritional products to veterinary clinics in the U.S. and U.K. The company was most definitely a high flyer in fiscal 2014, with revenues growing 27% to nearly $3 billion and EPS up 14% to $5.65. But MWI expects that fiscal 2015 sales will grow just 7% to 10% year over year, and it expects EPS expansion of 8% to 11%.

MWI's forecasts were partly affected by one big loss it suffered during the year: the termination of a distribution agreement with IDEXX Laboratories ($IDXX). MWI had been distributing IDEXX's diagnostic products to veterinary clinics, but in July, IDEXX moved to a direct sales and distribution model, electing not to renew its partnership with MWI.

During a conference call with analysts after the earnings report, CEO James Cleary said the IDEXX loss had more of an impact on the company's top line than it did on earnings. That's because MWI had lower gross margins on IDEXX products than it did on those of any other vendor, he explained. He added that overall growth has been strong in the companion animal market, but that the production animal market has slowed a bit.

MWI spent much of the last year integrating two big additions--rival distributor Invesco, which it acquired in August 2013, and VetSpace, a maker of veterinary practice management software that it picked up in September of this year. The company's SG&A expenses rose 23% to $61.8 million during the most recent quarter, largely due to expenses related to the acquisitions.

When Cleary was asked during the earnings call whether MWI was looking for more acquisition opportunities, he replied that the company is actively evaluating three types of possible add-ons: U.S. distributors, international companies, and "value-added technology opportunities" such as what VetSpace offered.

As for the disappointment reflected in the company's stock price, he urged analysts to look at the company's performance in the context of broader market trends.

"The fundamentals in both the companion animal market and the production animal market look good now, and so we're expecting decent market growth during the year, and we're also expecting that we'll continue to grow a few percentage points faster than the market," Cleary said.

- here's the earnings release
- access the earnings call transcript here
- get more at the Associated Press

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