AAnimal health is an interesting market sector. In 2013, Pfizer its animal health department outsourced, Zoetis (NYSE: ZTS), and the newborn stocks stomped their parent company in the mud. Pfizer’s stock is up 54% since the split, while Zoetis has achieved a market return of 465%. (So if Merck or Bayer Decides to someday outsource his animal health department, investors should be careful.)
While the pharmaceutical side of veterinary medicine has seen robust growth, this is nothing compared to what is happening in the diagnostic sector. The big company here (with a market cap of $ 47 billion) is Idexx laboratories (NASDAQ: IDXX) – its stock has risen 1,000% over the past decade. But even that pales in comparison to tiny little things Heska (NASDAQ: HSKA)which has increased an astonishing 2,000% in 10 years.
Animal health stocks are on fire! What about it? Let’s dive in.
Image source: Getty Images
Why is the Heska share exploding?
Heska is a small company with a market capitalization of $ 2 billion. So if you reverse the math, you can find out that Heska was a micro-cap a decade ago. Micro-cap investments are very risky and fraught with danger.
On the other hand, a microcap that zooms 2,000% higher might do something right. And the good news for all investors late on the Heska story is that this company is still very small. A stock with a market cap of $ 2 billion could very well throw in another 20 digger. Idexx, for example, is now a $ 47 billion giant. So there is clearly a significant market opportunity in animal health diagnostics.
ZTS data from YCharts
But is Heska’s stock actually rising? While Heska’s 10-year chart is amazing, the company had its initial public offering (IPO) back in 1997. And when you look at the company’s 24-year chart, it’s a whole different story. For most of Heska’s history, the stock has been terrible. It fell below its IPO price in the 20th century and stayed below its IPO price for most of the 21st century. To date, index funds have dramatically outperformed Heska over the past quarter century.
HSKA data from YCharts
Should investors buy a stock that has been a loser for so long? Most of us prefer to buy winners. However, people can change, companies can change, management can change, and circumstances can change. When I look at these two charts, I think, “Something is happening at Heska. This unfortunate stock is really starting to outperform.”
I suspect the Cuattro acquisition was huge
As early as 2013, Heska acquired a majority stake in Cuattro Veterinary, a fast-growing specialist in high-end X-ray machines for animals. These X-ray machines are top of the line digital products, quite expensive and beautifully designed. Robert Grieve, Co-Founder, Chairman and CEO of Heska, said in a press release:
We consider Cuattro Vet’s products to be the best in their class … Digital imaging and long-term archiving of imaging studies in cloud-based data centers is one of the fastest growing segments in veterinary medicine. These products are also often the most expensive investments a veterinarian makes. A coveted brand and unparalleled performance in this area not only creates a halo effect for our other products, but creates completely new sales and growth opportunities for Heska …
Image source: Heska
One of the founders of Cuattro Vet, Kevin Wilson, joined Heska as President and Chief Operating Officer (COO). A year later, Wilson joined Heska’s CEO, and he still holds that chair today. The company has long since taken over the rest of Cuattro Vet. Last quarter, Heska reported that laboratory supplies sales in North America increased 23.9%, while the North American X-ray division saw sales increase 91% year over year.
Part of what makes the stock skyrocket is the nature of the business. Heska’s X-ray platform is digital, so veterinarians can save images in the cloud. This creates some nice subscription income for the company. And as forecast, X-ray sales also spurred growth in the rest of the Heska product line. Revenue has grown from $ 78 million in 2013 to an estimated $ 225 million in 2021.
But while X-rays are growing faster, point-of-care laboratory diagnostics is still the biggest part of the business. Heska has installed 30,000 chemical analyzers in veterinary practices around the world and installed over 6,000 x-ray machines. And these are platforms, not one-time sales. When Heska sells an X-ray machine or one of its chemical analysis machines and the vets use the machines, it creates future revenue for Heska in the form of service and subscription income. This is similar to that Intuitive surgery Razor-and-blade model, and it creates a mighty moat for business.
While it’s true that Heska is unprofitable even with 97% sales growth, it’s also a bit of a misnomer. The management is on an acquisition tour and has acquired three companies in the last year. Before the acquisitions, Heska was profitable – it started making money in 2005. The company expects to make significant progress in selling its X-ray and diagnostic equipment to its acquired customers in Europe.
Despite its fantastic stock performance, Heska is still cheap at 8 times sales. Mr. Market still prefers Idexx, giving this company a multiple of 17.
The one possible dark cloud I see for Heska is Nano-X (NASDAQ: NNOX), an Israeli start-up that has a digital x-ray machine that promises to be much cheaper than what Heska’s offers. I expect that Nano-X will stir up the entire diagnostics market in the next few years. But I’m impressed with Heska’s comeback and will definitely put it on a watchlist.
10 stocks we like better than Heska
When investment geniuses David and Tom Gardner have a stock tip, it can be worth listening to. After all, their newsletter, Motley Fool Stock Advisor, which has been published for over a decade, has tripled the market. *
David and Tom just revealed what they think are the top ten stocks investors can buy right now … and Heska wasn’t one of them! That’s right – they think these 10 stocks are even better buys.
See the 10 stocks
* Stock Advisor returns on May 11, 2021
Taylor Carmichael owns shares of Intuitive Surgical and Nano-X Imaging Ltd. The Motley Fool owns shares of and recommends Intuitive Surgical and Zoetis. The Motley Fool recommends Idexx Laboratories and recommends the following options: long January 2022 $ 580 calls to Intuitive Surgical and short January 2022 $ 600 calls to Intuitive Surgical. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.