Speculative Trade - VCA Antech (WOOF)
Today's "Speculative Trade" is VCA Antech (WOOF). We have a higher level of confidence going into the WOOF earnings report than we did going into the Websense and PetMed Express reports. So, we are going into it with naked calls.
We waited on the Fed today and an anticipated decline in the shares heading into the report, due to valuation, lack of analyst support and the stock's rise within the last five days. We took half of our position in the Nov 35 Calls at $1.20 (down from the $1.25 close of Tuesday) and the other half at $1.20, just before close. I had some left over cash and applied that to some Dec 40 Calls at $0.35. Buying the November options is extremely risky, because if things go in the other direction than your bet, you have very little time before expiration to make up the loss. It can get bloody! Therefore, I must remind you to read my disclosure.
VCA Antech is a name I once followed as an analyst, and represents my favorite kind of name. It's the good company that is also a good stock; believe it or not, this is not always the case. WOOF has a business model I seek out and have benefited from on several occasions. It is a gnategory killer! It's competition is fragmented and consists mostly of small veterinary hospitals owning one or two locations.
Peter Lynch wrote, and I paid close attention, when you compete against mom and pops, you can grow. It's the Home Depot and WalMart story all over again, just in a smaller market. However, it's still a viable market. As home ownership has increased, pet ownership has benefited as well. Over 63% of American households have a pet, most of which are dogs and cats. Approximately $18 billion is spent yearly on animal healthcare services.
As these companies grow by acquiring small shops and through de novo means, they gain economies of scale. They become the most important purchaser to their suppliers. They write the biggest check to suppliers, and advantage from that. WOOF does not just have leverage with suppliers, but with customers also. It is capable of building brand awareness. It can advertise and bring clients to its hospitals, where the competition is only known by the very local community. It can offer greater breadth and quality of service, and we believe WOOF is doing so. In fact, WOOF has the largest lab network for pets in the country, and this business is benefiting from increasing testing, and will eventually benefit from more complicated tests. People spend money on their pets, a member of the American family. Also, WOOF's business does not get complicated by third-party payers like the human health care market.
WOOF does not appear cheap at first glance. It trades at 25.6X the 2007 EPS consensus estimate of $1.33. But look closer! WOOF has a track record of beating estimates, so that number is likely understated. Meanwhile, this year's likely understated growth is seen at 22%. Recent growth has been strong, so the PEG ratio is not as scary to us as it appears to wary analysts. We have not run a DCF model on it for awhile, but it always projected well, even after delevering the company a bit. So, there it is, WOOF WOOF!
We waited on the Fed today and an anticipated decline in the shares heading into the report, due to valuation, lack of analyst support and the stock's rise within the last five days. We took half of our position in the Nov 35 Calls at $1.20 (down from the $1.25 close of Tuesday) and the other half at $1.20, just before close. I had some left over cash and applied that to some Dec 40 Calls at $0.35. Buying the November options is extremely risky, because if things go in the other direction than your bet, you have very little time before expiration to make up the loss. It can get bloody! Therefore, I must remind you to read my disclosure.
VCA Antech is a name I once followed as an analyst, and represents my favorite kind of name. It's the good company that is also a good stock; believe it or not, this is not always the case. WOOF has a business model I seek out and have benefited from on several occasions. It is a gnategory killer! It's competition is fragmented and consists mostly of small veterinary hospitals owning one or two locations.
Peter Lynch wrote, and I paid close attention, when you compete against mom and pops, you can grow. It's the Home Depot and WalMart story all over again, just in a smaller market. However, it's still a viable market. As home ownership has increased, pet ownership has benefited as well. Over 63% of American households have a pet, most of which are dogs and cats. Approximately $18 billion is spent yearly on animal healthcare services.
As these companies grow by acquiring small shops and through de novo means, they gain economies of scale. They become the most important purchaser to their suppliers. They write the biggest check to suppliers, and advantage from that. WOOF does not just have leverage with suppliers, but with customers also. It is capable of building brand awareness. It can advertise and bring clients to its hospitals, where the competition is only known by the very local community. It can offer greater breadth and quality of service, and we believe WOOF is doing so. In fact, WOOF has the largest lab network for pets in the country, and this business is benefiting from increasing testing, and will eventually benefit from more complicated tests. People spend money on their pets, a member of the American family. Also, WOOF's business does not get complicated by third-party payers like the human health care market.
WOOF does not appear cheap at first glance. It trades at 25.6X the 2007 EPS consensus estimate of $1.33. But look closer! WOOF has a track record of beating estimates, so that number is likely understated. Meanwhile, this year's likely understated growth is seen at 22%. Recent growth has been strong, so the PEG ratio is not as scary to us as it appears to wary analysts. We have not run a DCF model on it for awhile, but it always projected well, even after delevering the company a bit. So, there it is, WOOF WOOF!
posted by The Greek | 3:07 PM
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