What's the Prognosis for This Pet Health Stock?

By Markets Fool.com

Image source: Idexx Laboratories, Inc.

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Idexx Laboratories, Inc.(NASDAQ: IDXX) sells diagnostic tools that veterinarians use to monitor pet health and that market is expanding as global spending on pet health climbs. The industry tailwinds are undeniably bullish for this company, but that doesn't necessarily mean that it's time to buy Idexx's stock. Let's take a closer look at Idexx's market opportunity and see if this stock can be added to your portfolio.

A growing market

According to polls, 50% of pet owners allow their dog and 65% of pet owners allow their cat to sleep in a human bed in their household, up from 41% and 51% a decade ago. Additionally, 70% of dog owners and 66% of cat owners buy toys for their pets, up from 62% and 51% 10 years ago.

Clearly, relationships between owners and pets are closer than ever and unsurprisingly, that's translating into greater spending on pet health. Last year, Americans spent $60.59 billion on their pets, up from $58.04 billion in 2014, and $36.3 billion in 2005, according to the American Pet Products Association. In 2015, $14.39 billion and $15.73 billion were spent on supplies/OTC medicine and vet care, respectively.

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Capturing their fair share

Veterinary and related services spending has grown by a compounded 8.9% per year since 1980 and that's driving sales higher at Idexx, which generates 85% of its revenue from the companion animal market.

The companyhas a 40% share of the $3.3 billion pet diagnostics market and over the past 12-months, sales total $1.7 billion. Since Idexx has already established itself as a leader in this market, an increasingly larger proportion of its sales are coming from existing relationships, and that's great news for investors because it provides top-line clarity, stability, and consistency.

Idexx is also delivering plenty of profit to investors thanks to cost-savings initiatives. Earnings per share has improved by a mid-teens rate annually over the past five years and this year, Idexx estimates its operating margin will improve by 1%, providing even more support to earnings. Overall, management targets 10% compounded revenue and 15% compounded earnings growth in the future.

Image source: Idexx Laboratories, Inc.

Looking ahead

The companion animal diagnostic market is attractive and as the big kahuna in the space, Idexx is arguably the best way to invest in it. However, the company's shares don't come cheap. Earnings per share estimates for next year have climbed from $2.48 to $2.68 over the past two months, but a rally in the company's stock price means that shares are trading at a forward price to earnings ratio of 42.That's a pretty stiff price to pay for a 10% grower, so rather than buying this stock now, it may make more sense to look for a pull-back to buy.

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Todd Campbell has no position in any stocks mentioned.Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned.Like this article? Follow him onTwitter where he goes by the handle@ebcapitalto see more articles like this.The Motley Fool recommends Idexx Laboratories. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.