Trading at its most reasonable valuation since 2016, this pet healthcare diagnostics leader could be a once-in-a-decade opportunity today.
While the debate over whether it’s better to pay for high-quality or high-growth businesses will never end, the easiest solution is to find stocks offering both.
One company that fits this best-of-both-worlds billing is Idexx Laboratories (IDXX -0.19%), offering leading pet healthcare diagnostics operations. Delivering annualized revenue and free-cash-flow growth of 10% and 25%, respectively, over the past decade, the company’s razor-and-blade model has turned it into a steady compounder.
Idexx Labs has a wide array of solutions that help keep pets happy and healthy, ranging from point-of-care diagnostic equipment and rapid assay tests to reference lab guidance, consulting services, and veterinary software. Thanks to this suite of solutions, the company has become a leader in its $45 billion pet healthcare diagnostics niche.
However, after experiencing a boom during the pandemic as pet adoptions ballooned, Idexx has struggled to get its sales growth back to its old double-digit mark, registering 7% growth in its most recent quarter. Due to this combination of decelerating growth and the company’s once-lofty valuation, Idexx’s share price has dropped 40% from its all-time highs in 2021.
But there may be better days ahead. With the shares now trading at their most reasonable valuation in almost a decade, here are four reasons why Idexx is one of the most compelling S&P 500 stocks to buy right now.
1. The durable pet healthcare industry
Typically, the pet care industry is as resilient as any industry can be, barring pandemic-aided boom-and-bust cycles. In a recent 2024 study on spending, only 4% of pet parents stated that they delayed a sick visit to the vet’s office, whereas 21% of respondents had delayed a vacation, and 44% had reduced their spending on eating out.
And this is not a one-year phenomenon. Over the past decade, the average lifespan of dogs and cats has risen by 1.4 years and 1.9 years, respectively, highlighting the ever-growing pet-human bond. This bond between humans and their furry friends is even stronger among younger millennial and Gen Z pet parents, who are more likely to agree to annual pet wellness exams.
Buoyed by this long-term megatrend, Future Market Insights believes the vet diagnostics market will grow by 10% annually through 2034, while Idexx itself estimates a 9% growth rate is possible through 2048.
Image source: Getty Images.
2. Idexx’s razor-and-blade business model
In addition to operating in a resilient market, Idexx’s razor-and-blade business model provides additional stability for investors. With an installed base of over 144,000 diagnostics instruments — up 10% from last year — Idexx has a truly global presence.
Despite this massive installed base of equipment, management believes it could still double these placements over the long term as it dives deeper into international markets.
However, what makes this equipment important to investors is that it sets the stage for what really drives Idexx’s performance — recurring sales from vet lab consumables (such as test cartridges), reference lab diagnostics, and consulting services. These high-margin, recurring revenue streams account for 80% of Idexx’s sales, making the company a durable investment proposition.
3. Expanding growth optionality
While the company’s current operations are promising enough, its developments in oncology and software could spur a new wave of growth. Expanding upon its current cytology, hematology, and urine analysis solutions (among many more), Idexx plans to launch a suite of oncology products in Q4 2024 and 2025.
Within the next three years, management believes it will be able to expand its panel to detect over 50% of canine cancer cases, enabling earlier detection and better treatment options.
In addition to this promising growth area, Idexx is building out its full suite of veterinary software that covers everything from pet-owner engagement to payments and digital workflows at the vet office. Already home to an industry-leading customer satisfaction score, the company’s software solutions have grown by 15% annually since 2019, with recurring revenue in the unit growing even faster at 23%.
4. Idexx’s once-in-a-decade valuation
Although Idexx isn’t trading at a “traditionally cheap” valuation, at 42 times free cash flow (FCF), its current price-to-FCF ratio is the lowest it has been since 2016.
IDXX Price to Free Cash Flow data by YCharts
While this valuation remains a premium to the S&P 500‘s average P/FCF of roughly 32, I’d argue that Idexx and its razor-and-blade model, durable industry, and growth optionality make it one of the better stocks in the index and worthy of this valuation.
Home to a return on invested capital (ROIC) of 38% — the 19th highest in the S&P 500, which is a historical indicator for outperformance potential — Idexx looks like a fantastic buying opportunity following its recent 40% pullback.