BACKGROUND
Back in 2015, during my ongoing research and due diligence for candidates to buy in the healthcare sector, I ran across an anomaly - Heska Corporation (HSKA) - given in the peer group comparison for ANI Pharmaceuticals (a company that I invested in and gave a heads up about in a post here over a year ago http://discussion.fool.com/small-cap-ani-pharmaceuticals-3214115… ). I say anomaly because Heska serves the pet healthcare sector. After completing my due diligence in 2015, I decided to invest in this up and coming small cap.
IDEXX Laboratories recent appearance here jogged my memory that back in 2015, I conducted a comparison analysis, Heska vs. IDEXX and others. I found the old files on my retired MacBook Pro that I’ve updated with FY 2016 info for only Heska and IDEXX and provide hereafter for those interested.
HESKA CORPORATION BUSINESS
The following are excerpts from the Heska FY 2016 10K filing:
We sell advanced veterinary diagnostic and specialty products. Our offerings include blood testing instruments and supplies, digital imaging products, software and services, vaccines, local and cloud-based data services, allergy testing and immunotherapy, and single-use offerings such as in-clinic diagnostic tests and heartworm preventive products. Our core focus is on the canine and feline healthcare space.
Products and Services
Our business is composed of two reportable segments, Core Companion Animal Health (“CCA”) and Other Vaccines, Pharmaceuticals and Products (“OVP”).
The CCA segment includes, primarily for canine and feline use, blood testing instruments and supplies, digital imaging products, software and services, local and cloud-based data services, allergy testing and immunotherapy, and single use offerings such as in-clinic diagnostic tests and heartworm preventive products.
The OVP segment includes private label vaccine and pharmaceutical production, primarily for cattle but also for other species including equine, porcine, avian, feline and canine. All OVP products are sold by third parties under third party labels.
[For more detailed information, here’s the latest Heska Investor Presentation:
https://www.heska.com/documents/investor_relations/heska-inv… ]
Competition
Our market is intensely competitive. Our competitors include independent animal health companies and major pharmaceutical companies that have animal health divisions. We also compete with independent, third-party distributors, including distributors who sell products under their own private labels. In the point-of-care diagnostic testing market, our major competitors include IDEXX Laboratories, Inc., Abaxis, Inc. and Zoetis Inc. The products manufactured by our OVP segment for sale by third parties compete with similar products offered by a number of other companies, some of which have substantially greater financial, technical, research and other resources than us and may have more established marketing, sales, distribution and service organizations than our OVP segment’s customers. Companies with a significant presence in the animal health market such as Bayer AG, CEVA Santé Animale, Eli Lilly, Merck, Sanofi, Vétoquinol S.A., Virbac S.A. and Zoetis may be marketing or developing products that compete with our products or would compete with them if successfully developed. These and other competitors and potential competitors may have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than we do. Our competitors may offer broader product lines and have greater name recognition than we do.
CORPORATE PROFILE
HESKA IDEXX
Market Cap 0.696 B 13.53 B
Employees 327 7,365
52-wk high 99.98 154.56
3/24/17 Price 98.72 153.74
52-wk low 26.26 75.03
EV/EBITDA (mrq) 32.24 33.13
P/E (ttm) 69.03 63.01
Fwd P/E 48.16 45.35
P/B (mrq) 7.97 N/A
P/S (ttm) 5.35 7.62
Heska Corporation is a small cap $696.26 million company with a currently high 69 P/E ratio due to the stock price rocketing upward 270% to a recent 52-week high of $99.98/share.
Graphically, here’s a chart showing HSKA substantially outperforming the S&P 500 and crushing its competitor IDXX performance over the recent 52-week period.
http://bigcharts.marketwatch.com/advchart/frames/frames.asp?..
REVENUE, NET INCOME & DILUTED EPS
What more needs to be said, given the following Heska Y-oY percentage gains in revenue, net income and EPS that this board has very high proclivities for.
REVENUE $M HESKA YoY Change IDEXX YoY Change
FY 2016 130.1 24.4% 1,775.4 10.8%
FY 2015 104.6 16.4% 1,601.9 7.8%
FY 2014 89.8 14.7% 1,485.8 7.9%
FY 2013 78.3 7.6% 1,377.1 6.5%
FY 2012 72.8 1,293.3
NET INCOME $M
FY 2016 10.5 100.6% 222.0 15.6%
FY 2015 5.2 101.3% 192.1 5.6%
FY 2014. 2.6 181.9 (3.1%)
FY 2013 -1.2 187.8 5.3%
FY 2012 1.2 178.3
EPS diluted $
FY 2016 1.43 93.2% 2.44 19.0%
FY 2015 0.74 80.5% 2.05 14.5%
FY 2014 0.41 1.79 2.9%
FY 2013 (0.21) 1.74 9.4%
FY 2012 0.22 1.59
MARGINS
While Heska gross margins are steady, both operating and profit margins are on the rise.
MARGINS HESKA IDEXX
GROSS:
2016 41.4% 54.9%
2015 42.3% 55.6%
2014 39.8% 54.9%
2013 39.1% 54.9%
2012 42.7% 54.1%
OPERATING:
2016 12.7% 19.7%
2015 8.2% 18.7%
2014 3.2% 17.5%
2013 -1.8% 19.4%
2012 3.0% 20.3%
PROFIT:
2016 8.1% 12.5%
2015 5.0% 12.0%
2014 2.9% 12.2%
2013 -1.5% 13.6%
2012 1.7% 13.8%
ROIC and ROIC-WACC (EVA)
Both companies are creating positive economic value for their investors. ROIC means Return of Invested Capital; WACC is Weighted Average Cost of Capital; EVA means Economic Value Add and represents the ROIC minus WACC spread. So, as shown below for 3/24/2017, Heska is creating 9.3 cents of pure economic value for every dollar invested, and IDEXX is creating 26.7 cents for every dollar invested.
HESKA ROIC WAAC EVA IDEXX ROIC WAAC EVA
3/24/17 15.3% 5.9% 9.3% 3/24/17 32.0% 5.4% 26.7%
2016 15.6% 8.3% 7.3% 2016 33.4% 4.6% 28.8%
2015 17.3% 10.6% 6.7% 2015 29.4% 3.8% 25.6%
2014 21.9% 9.6% 12.3% 2014 28.2% 9.1% 19.1%
2013 17.6% 5.2% 12.3% 2013 29.4% 9.4% 20.0%
2012 21.1% 5.8% 15.3% 2012 29.2% 8.0% 21.2%
2011 19.4% 6.8% 12.7% 2011 28.3% 8.2% 20.1%
2010 18.3% 11.0% 7.3% 2010 26.3% 11.5% 14.9%
2009 16.9% 11.3% 5.6% 2009 23.5% 12.3% 11.3%
2008 17.6% 8.8% 8.8% 2008 24.2%. 11.5% 12.7%
2007 14.1% 10.7% 3.4% 2007 24.4% 3.7% 20.7%
CAPITAL STRUCTURE
FCF HESKA IDEXX
($ M)
2016 2.7 270.0
2015 (1.6) 133.0
2014 3.2 175.0
2013 (3.3) 167.0
2012 (1.9) 164.0
CAPITAL STRUCTURE HESKA IDEXX
Cash (mrq) 10.79 M 391.85 M
Working Capital 22.86 M (88.984) M
Total Debt (mrq) 0.75 M 593 M
Total Equity (mrq) 86.975 M (108.213) M
Total Capitalization 86.975 M (108.213) M
Debt/Equity (mrq) 0.9% (11.11%)
Debt/Capitalization 0.9%
Current ratio (mrq) 1.71 0.90
Heska clearly has an exceptional, superior balance sheet in the FY 2016 10K report that results in an extremely low debt/equity ratio of less than 1%, a high current ratio and an extremely low debt/capitalization ratio of less than 1%. A non-GAAP measure of a company’s leverage is the company’s Debt-to-Capitalization Ratio, i.e., the ratio of its total debt (short-term and long-term) to its combined total debt and total equity. This ratio is important because, in the event of an economic turndown, a company with a high ratio may have a difficult time making the interest payments on its debt.
On the other hand, back in 2015 when I looked at IDEXX, the company had a very problematic balance sheet that remains to date and requires further analysis by potential investors.
CONCLUSION
I like a lot my anomaly find in 2015 - Heska Corporation.
As always, conduct your own due diligence and decision making.
Regards,
Ray