Saturday, February 5, 2011

Virbac Offers Secular and Cyclical Growth

Virbac Looking After Animal Health





Virbac is a very interesting animal health pharmaceutical company and a good stock to research. It offers a good balance of secular growth from companion animals (pets) and exposure to the positive long term trends of food producing animals. I think is a good stock to buy and picked some up recently. It is a good stock to hold within an agribusiness focused portfolio.

For potential investors, Virbac's companion animal segment growth should be seen as trending with general increases in pet populations and, with company specific issues like new product releases and market share grab. Alternatively, the food producing animal segment is more cyclical and exposed to the increasing usage of parasiticides, antibiotics and vaccines in animals. I think this is a good long term trend as protein consumption is on the increase and utilisation of animal pharmaceuticals will help to deal with increasingly concentrated production techniques.


Virbac Revenue Breakdown

Here is a table of percentage of revenue share by geography and segment to the half year of 2010


%
Rev Share
Growth
Europe Companion
34.6
20
Europe Food
15.8
0
N America Companion
14.1
25
RoW Companion
11.1
27
RoW Food
21.7
66

Source: Virbac

Clearly there is a slowdown in European Food market and high feed prices have not helped. However, the good news is that this segment only makes up nearly 16% of revenues and the rest of the world is doing fine. Moreover, there is a clear split between how bovine products (77% of food revenues) are performing and how swine & poultry are currently faring.

The companion market is doing very well with new product launches and a return to economic growth.



Virbac Food Producing Animal Markets

For 2010 Virbac reported 5% organic growth in this segment. As discussed above, emerging markets are doing much better than Virbac's core market of Europe and in particular France. These markets can be seen as cyclical and dependent upon the dynamics of production/price factors in these markets. What is common to all of them (swine, poultry and bovine) is that they are experiencing rising feed costs.

When feed costs rise, supplier's margins get squeezed unless they have pricing power through relatively low production. Ultimately, the price increases tend to cause production expansion. It is a classic commodity price cycle. Here is where we are now with swine...

Swine (pork) - Monthly Price - Commodity Prices

...and with bovine...
Beef - Monthly Price - Commodity Prices

...so it looks like, after a very difficult period from summer 2008 to Jan 2010, prices are very strong. Although feed costs are high, as long as prices are high, margins and profitability can expand. This will encourage future production. There is an unfavourable supply/demand balance in poultry but only makes up a small portion of Virbac's overall sales.

Unless a global economic slowdown ensues, I would expect production expansions in bovine and swine and this has to be good news for Virbac's sales of parasiticides and antibiotics.

Tyson foods recently gave a very upbeat outlook for 2011.


Virbac Companion Animal Market

This segment makes up 60% of sales and revenues in 2010 were up 13.5% organically. I've broken down sales in this segment by product here

%
Rev Share
Parasiticides
30.8
Vaccines
14.6
Antibiotics/Dermatology
14.9
Specialities
12.6
Horses
7.9
Petfood
6.6
Others
12.6

Source: Virbac

Of particular note was the success of Fiproline and Effipro (Europe)which are spot-on and spray products that treat flea and tick infestation in cats and dogs. They were launched in July 2009 and have already grabbed good market share. Virbac has a sales target of E15-20m and sales were estimated at the top end of this forecast. Virbac intends to launch Effipro in the US by the end of 2011.

Of the existing products in the US, sales of Iverhart (heartworms) have been expanding rapidly. Going forward Virbac plans to launch Canileish (canine leishmaniasis vaccine) by the end of 2011 with a European sales target of E25-30m.


Virbac Forecasts

With the new product launches in the companion sector plus a cyclical pick up in the food sector, I think Virbac is capable of hitting analyst estimates and possibly exceeding them. Here is a summary of consensus forecasts


(m's)2007200820092010E2011E2012E
Revenue438.6443.4467.4572.5612.3659.4
growth %9.21.15.422.57.07.7
EPS (c)360411448650707791
growth %23.714.29.045.18.711.9
Source: FactSet Research Systems Inc

At a current share price of E111 this puts Virbac on a forward PE of 15.7x and gives a market cap of E965m and an enterprise value of E998m. Free cash flow generation has also been improving with generation of E23.7m and 42.6m for 2008 and 2009 respectively. On a trailing basis it is E57.6m
I think Virbac is attractively priced for its long term growth prospects and the recent dip could be providing a decent buying opportunity with a target of E129 in mind.



Source:
Virbac 2010 Sales release