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September 2014



Pitch for Arista Networks (ANET)

September 30, 2014 – Comments (0) | RELATED TICKERS: ANET , CSCO

I recently rated Arista Networks as outperform on CAPS. Here is my reasoning at this point:   [more]



10K Challenge - MWI Veterinary Supply (NASDAQ: MWIV)

September 29, 2014 – Comments (0) | RELATED TICKERS: MWIV.DL

MWI Veterinary Supply, Inc. (NASDAQ: MWIV)
Industry: Medical Distribution 

Business in One Sentence 
MWI Veterinary Supply distributes animal health products for companion and production animals (including pharmaceuticals, vaccines, veterinary pet food, and supplies) to veterinarians across the United States and United Kingdom. 

Value Proposition
MWI connects animal health product producers/manufacturers to veterinarians, helping ensure veterinarians have the necessary products for animal health. 

Competitive Strategy and Advantage 
Currently MWI’s average sales per veterinary practice in the U.S. is roughly $56,000. MWI’s strategy primarily centers on increasing sales per customer through marketing efforts, boosting its sales force, adding products to its portfolio, and expanding value-added services available for veterinarians. Value-added products are the main differentiator in this space. MWI’s value-added products include an eCommerce platform, technology management systems, and special order fulfillment, in addition to things like pet cremation (that’s a thing now?). MWI also pursues selective acquisitions. 

MWI may have an advantage thanks to its vast network of products for both companion and production animals and a sales force of more than 500 people. In fiscal 2013 MWI sold more than 41,000 different products sourced from over 700 vendors (22,000 products from 400 vendors in the U.K.). MWI claims to have maintained long-term relationships with key vendors including IDEXX Laboratories, Boehringer Ingelheim, and Elanco. 

Other Business Details 
-- 97% of MWI’s revenue comes from consumable medicines and supplies, making for a recurring revenue stream. 86.6% of sales came from the U.S. (up from 83.3% in 2011). 

-- Independent veterinary practices have historically accounted for about 87% of MWI’s product sales.

-- MWI’s senior management has an average tenure of more than 15 years with the company. 

-- 43% of MWI’s fiscal 2013 sales in the U.S. came online (up from 36% in 2011); 96% of U.K. orders are done electronically. 

-- Operates 13 distribution centers in the U.S. and one in the U.K., offering next-day delivery service on products stocked in warehouses. 

-- 59% of MWI’s U.S. sales came from companion animal market; 41% from production animal market.

-- MWI’s ten largest vendors in the U.S. account for approximately 70% of total sales. Zoetis alone accounts for 20% of sales (down from 24% in 2012 and 2011). 

-- Veterinary clinics buy products from more than one distributor and vendors also sell their products to multiple distributors. On the surface there appears to be very little switching cost. 

-- The need for the distributor middleman in animal health products disappears over time. 

Big Few
1. What percentage of MWI’s customers utilize the company’s value-added services? How has this number been trending in recent years? 

2. What does MWI’s customer and vendor retention look like and what are their trends? 

3. Are other distributors in this space offering similar value-added products? 

4. How does MWI’s scale and product selection compare to other distributors? 

5. Is MWI a necessary middleman? 

This is an interesting market, but I am not sure an animal health products distributor (like MWI) is the most appealing opportunity to take advantage of increased spending in the pet industry. As you can see here, spending on pets is steadily increasing in the U.S.: This is a category worth watching, but I'm not sure MWI has a sustainable business model for the long haul.   [more]



Growth and Value

September 27, 2014 – Comments (2) | RELATED TICKERS: CMG , GOOGL

The subject of growth and value comes up a lot in Fooldom and the investing world in general. I think there are components of growth and value that go into any investment. (Put in the simplest terms, we wouldn't invest if we didn't expect some measure of growth in our investments, whether in gold, stocks, bonds, and so on. And we wouldn't invest in a company if we felt the current price offered little or no long-term upside.) 

The first thing that I remind myself is that growth itself is a form of value, especially sustained growth. Chipotle is a good example of this. Chipotle, as a stock, has rarely looked cheap based on traditional metrics. In 2007, following its IPO, Chipotle traded at a P/E of 55-60 and the P/E got as high as 75 in 2008. As the stock market plunged and the economy entered a recession, the stock briefly fell below a P/E of 17 toward the end of 2008. Today the stock is back at a P/E of 58, certainly higher than I would have anticipated when I first invested in the company in 2007. 

Chipotle, as I've probably posted too often on this board, continues to knock it out of the park when it comes to financial performance. The company has thus far justified the premium valuation with sustained exceptional growth, recently reporting the best comps growth (17%+) the company has had since its first quarters as a public company. Total aside: just this weekend I went to a Chipotle in DC's Chinatown, and the place was swamped (the line double-backed and wrapped around the entire inside of the restaurant). It took us 25 minutes to get through the line and make our order. No wonder their comps growth has been through the roof, sheesh. 

My friend and fellow Fool John Rotonti wrote a great article examining lessons investors can learn from Google's ten years as a public company. Here are two quick snippets relevant to this conversation (emphasis added): 

The lesson here is that DCF's and P/E ratios can't be used to reliably value a fast growing company that has the potential to change the world. This obviously begs two questions: How can investors determine which companies are going to change the world (which company will be the next Google, Netflix, Amazon, or Facebook) and how do we value them?...

Above average companies deserve to trade at an above average multiple because they have the ability to increase their intrinsic value over time. Paying a dollar for a dollar is still "value" investing if that dollar will be worth five or even ten (in the case of Google) dollars down the road.

Growth is valuable. The tricky part is finding companies capable of sustaining strong growth over many years, rather than fizzling out after a few years. The way I see it, qualitative factors are what drive a business to deliver superior financial performance: leadership, vision, strategy, and so forth. I start with the qualitative factors and then begin to assess, given market size/opportunity and reasonable growth estimates, what this company can realistically be worth in 5 or 10 years. 

Finally, I don't usually invest in a company with an intent to sell. Traditional value investors, on the other hand, are often looking to sell a stock once it hits a certain level. I see the ideal holding period as forever or many, many years. I think it is important to distinguish between the difference ofinvesting to sell versus investing to hold. With my own portfolio I am increasingly focused on the latter.   [more]

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