Idexx Earnings: Fair Value Estimate Intact, Softness in Visit Volume Could Linger Into 2024

Idexx Labs IDXX 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.

Despite revenue growth that has clocked in slightly below Idexx’s historical level that hovers around 10%, the company kept a firm hold on expenses, and added roughly 100 basis points to its 30% operating margin in the third quarter. The year-to-date results remain consistent with our 2023 estimates. However, visits to the vet have remained soft through the warm-weather months, which tend to offer the most favorable seasonality, compared with 2022′s summer season that also featured softer visits coming off the pandemic pet boom that inflated demand in 2020 and 2021. We think there are several factors that are likely playing a role in the current pullback, though it is difficult to untangle them. First, pressure on labor from burnout and turnover following the pandemic left animal hospitals with capacity constraints. Second, we surmise recent inflationary pressure has also left pet owners thinking twice before taking on vet bills. This is consistent with the relatively larger declines seen in wellness visits, which are more elective than clinical visits. Though clinical visits also declined in the third quarter, the trend seems to have moderated from 2022. These trends leave us with tempered expectations for 2024.