IDEXX Laboratories: Excellent Business But Extremely Overpriced

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Investment Thesis

With its margins of 26% and return connected superior of 46%, IDEXX Laboratories, Inc. (NASDAQ:IDXX) tin overshadow companies nan for illustration of Google (GOOG, GOOGL), Meta Platforms (META), and Microsoft Corporation (MSFT). Founded successful 1983, IDEXX is simply a U.S. healthcare company, that presently leads nan veterinary manufacture processing diagnostics devices to fulfill veterinarians' mundane needs.

Over nan years, IDEXX has delivered coagulated and accordant results combining gross maturation pinch unthinkable ratio and profitability, and we tin comfortably expect nan institution to support succeeding successful nan future.

With this premise, IDEXX's stocks mightiness look an evident buy, but unfortunately, nan institution is highly overvalued astatine today's prices if compared to an intrinsic worth of $259 per share.

In today's study we will measure why, contempt having an unthinkable business exemplary expected to present beardown rate flows successful nan coming years, IDEXX Laboratories does not correspond a bully finance opportunity fixed nan existent marketplace conditions.

Business Model

IDEXX Laboratories, Inc.'s business exemplary is divided into 3 main segments: Companion Animal Group, Water value products, and Livestock, Poultry and Dairy solutions.

The Companion Animal Group (CAG) offers a wide assortment of diagnostic devices that thief veterinarians and pet owners to observe pet diseases successful clip and perchance cure them. IDEXX's connection comprises some researcher instruments, usually sold erstwhile to each customer, and consumable trial kits, which are purchased connected a recurring ground by customers.

In summation to nan diagnostic tools, nan CAG conception besides comprises nan improvement and waste of package products, to thief veterinary clinics to amended their regular operations, and a web of owned laboratories to which veterinarians tin taxable their samples to beryllium analyzed aliases inquire for consulting services.

The Water conception comprises testing solutions capable to observe nan beingness of germs successful h2o and are usually sold to h2o inferior companies and authorities laboratories.

Finally, nan Livestock, Poultry and Dairy conception offers diagnostic devices that are utilized by farmers to trial nan wellness position of cows, pigs, and chickens, to forestall illnesses for illustration African Swine fever, and to trial dairy products to guarantee their quality.

Revenues are generated 91% by nan Companion Animal Group, of which nan waste of consumable products accounts for 87% of full conception revenues, while nan Water and Livestock segments respectively relationship for 5% and 4% of full revenues.

Operating Performance

Looking astatine IDEXX's past operating performance, revenues went from $1.3 cardinal successful 2012 to $3.3 cardinal successful 2022 increasing astatine a compound yearly maturation complaint (CAGR) of 10%.

IDEXX Laboratories revenues (TIKR Terminal )

Both nan median operating separator and nan median return connected invested superior (ROIC) of nan past 5 years are excellent, respectively astatine 25.7% and 46.7%, showing really awesome IDEXX's business exemplary is and nan powerfulness they person connected nan veterinary industry, permitting them to support precocious prices without losing marketplace shares.

IDEXX Laboratories' median 5Y operating separator & ROIC (TIKR Terminal )

Combining gross maturation and precocious profitability, nan institution managed to present coagulated free rate flows to nan patient (FCFF) for nan full period, adjacent to $388 cardinal successful 2022.

IDEXX Laboratories FCFF (Personal Data)

Financially, IDEXX has a antagonistic rate position of -$1.3 billion, but contempt having a sizeable magnitude of indebtedness outstanding nan institution results financially unchangeable having an liking sum ratio of 22.55, meaning that nan operating income tin much than screen nan liking expenses being 22 times greater, truthful IDEXX is very improbable to default.

IDEXX Laboratories financial position (TIKR Terminal )

Growth Drivers

As emblematic for healthcare companies, IDEXX heavy relies connected its investments successful R&D expenses to substance its growth. By processing caller patients and improving its diagnostic tools, IDEXX will beryllium capable to support its starring position successful nan veterinary industry, which implies maintaining its astonishing margins and returns connected investments.

Future maturation tin beryllium wished by looking astatine really overmuch and really good a institution has invested successful its maturation drivers. The Reinvestment Margin shows what percent of revenues has been reinvested into nan company, while nan Sales to Invested Capital ratio, shows really overmuch revenues person been generated for each dollar invested by nan company. If we multiply these 2 values and return nan median worth complete nan years, we get nan expected maturation complaint successful revenues based connected really overmuch and really good a institution has invested successful its maturation drivers.

In our case, IDEXX's expected maturation complaint is 12.12%.

IDEXX Laboratories expected maturation complaint (Personal Data)

Market & Risks

Given nan precocious margins that qualify nan manufacture successful which IDEXX operates, title tin beryllium easy attracted to participate nan market. Among IDEXX's main competitors, we person Zoetis (ZTS) and Mars Petcare, a subsidiary of Mars Incorporated, but contempt these 2 beardown players, IDEXX holds a 19.5% market share.

The biggest threat to IDEXX's early occurrence is its expertise to support and protect its patents and licenses successful bid to person nan exclusivity of its high-quality products that will licence nan institution to warrant higher prices and consequentially amended margins.

IDEXX Laboratories patents expiring day (IDEXX Laboratories)

DCF Model

I usage nan discounted rate travel ("DCF") study method to worth companies. The purpose of a DCF study is to find nan coming worth of expected rate flows generated by nan institution successful nan future. The first measurement is to task nan maturation complaint astatine which revenues will turn successful nan future. Secondly, we will request to presume nan grade of ratio and profitability astatine which nan institution will move revenues into rate flows.

Efficiency is represented by nan operating margin, and profitability by nan ROIC. Having nan gross projections and early operating margins, we get nan EBIT and, aft subtracting taxes, we get nan nett operating profit aft taxes. The ROIC is utilized to find nan reinvestments needed to support early growth, determining really overmuch profit nan institution generates from each dollar reinvested into nan company.

Future rate flows are calculated by subtracting nan reinvestments from nan nett operating profit aft taxes. The higher nan maturation rate, nan higher nan reinvestments needed to support it, hence nan little early rate flows will be.

The past measurement of a DCF study is to use nan discount complaint to early rate flows, usually calculated utilizing nan weighted mean costs of superior ('WACC').

Projections

Now trying to task IDEXX's early performance, we will presume nan institution to support a humble and dependable maturation rate, establishing itself arsenic 1 of nan main subordinate successful nan veterinary manufacture pinch precocious margins and returns connected capital, that will lead to a coagulated rate flows procreation complete nan years.

Starting pinch revenues, nan first measurement is to use nan expected maturation complaint of 12.12%, based connected really overmuch and really good nan institution has reinvested successful its maturation drivers, and aft that, we tin fto it slow diminution arsenic nan institution enters its dependable state. Revenues are expected to double successful 10 years, astatine a CAGR of 7.28%, reaching $6.8 cardinal by 2032.

As regards early ratio and profitability, we tin expect IDEXX to support fantabulous values, arsenic we presume nan institution will stay astatine nan apical of nan industry. By 2032 nan operating separator tin beryllium expected to amended to 30%, arsenic nan institution mightiness use from larger economies of standard increasing its revenues, while nan ROIC tin beryllium expected to stay successful nan 40% range.

With these assumptions FCFF are expected to beryllium astir $1.4 cardinal by 2031, increasing astatine a CAGR of 13.74%.

IDEXX Laboratories capacity projections (Personal Data)

Valuation

Applying a discount complaint of 7.99%, calculated utilizing nan WACC, nan coming worth of these rate flows is adjacent to an equity worth of $21.4 cardinal aliases $259 per share.

IDEXX Laboratories intrinsic worth (Personal data)

Conclusion

Given my study and assumptions, IDEXX Laboratories, Inc. banal appears to beryllium overvalued astatine today's prices.

IDEXX Laboratories, Inc. is specified a awesome company, pinch an unthinkable business exemplary that rivals nan 1 of nan Google's, Metas', and Microsoft's retired there, that nan marketplace is presently paying a immense marketplace premium to jump connected board. Unfortunately, until we spot a important value correction, IDEXX Laboratories, Inc. does not correspond a bully finance opportunity.

I'm a financial expert focused connected banal study utilizing nan DCF model. My study focuses connected US, European and Chinese companies for semipermanent finance opportunities. Check my youtube transmission BlackNote Investments https://www.youtube.com/channel/UC8rqJsIjenaprbw0446OxaQ