Vetoquinol SA – It’s a family affair
Vetoquinol is A French company specialized in “Animal health”, i.e. pharmaceuticals for animals. I came across the company more or less by random. The company went public in 2006 but the majority (~62%) is owned by the founding family, the current CEO is the 3rd generation of the founders. Some key figures:
Market Cap 450 mn EUR
Operating Margin (11 year avg) 11,0%
ROCE (11 year avg): 10,8%
EPS CAGR 8 year +4,0%
Debt: ~ 3 EUR net cash per share
Despite a relatively low Beta, in the long run Vetoquinol is very much in line with the CAC mid/small cap index as we can see in the chart:
At first sight, there was a lot to like at Vetoquinol when I read 2-3 of their annual reports(available in English):
+ family owned/run business (CEO 400 k salary, 46 years old), looks like good alignment of interest
+ only 3 analysts are following the company
+ slow grower
+ Good cash flow conversion (Op. CF > NI)
+ low beta stock (0,7)
+ generally attractive market (animal health)
+ super solid balance sheet (net cash, no pensions etc.)
+ reinvestment potential
However there were also some items which were missing for a “perfect” stock:
– not super cheap
– below average ROE/ROCE etc.
– no ROE/ROIC targets
– relatively frequent (but small) M&A
Let’s take a quick look at the business itself
I am clearly not an expert in the pharmaceutical area. However, reading through Vetquinol’s annual reports one can identify some differences to the “normal” pharmaceutical business:
+ longer product cycles than “normal” pharma (25 years), less threat from generics
+ distribution via vets is predominant
+ mostly directly paid by the customer, no health insurers etc.
+ long-term growth potential
+ 2 main market segments: Pets and “farm animals”.
+ already a quite concentrated market, however many big players are subsidiaries of larger groups
There are 2 other listed “pure play” animal health companies, Zoetis (Pfizer Spin-off) and French competitor Virbac. If we look at some metrics, both companies are valued much much higher then Vetoquionol:
|Name||Ticker||Mkt Cap (EUR)||P/B||P/E||EV/Next Yr Est EBIT|
|VETOQUINOL SA||VETO FP||456.86M||1,61||16.36||10,9|
|VIRBAC SA||VIRP FP||1.40B||1,57||43.83||16.81|
|ZOETIS INC||ZTS US||19.80B||18.78||27.79||17.34|
I think especially in Zoetis case this has to do with the general current hype in health care. However there are also clearly risks in the business model
– change of distribution model (direct/internet) could be a challenge
– Vetoquinol could turn out to be too small ? They claim to be the number 9 globally, but the distance to the large players is big
– they do have exposure to EM markets, actually they just acquired some EM based companies (Brazil, India)
Vetoquinol itself claims to have the following competitive advantages:
+ focused player
+ long-term oriented management = shareholder
+ family owned –> acquisition of Brazilian family business only possible because they are family owned
+ very good corporate culture
Even if we take into account net cash, Vetoquinol is not cheap on an absolute basis with a P/E around 15 times and EV/EBIT of 11. I would be prepared to pay such a multiple only for a very good company and I am not sure if Vetoquinol is a very good company. Yes, they are cheap compared to other comparable companies but I guess that those companies are already much too expensive.
So in order for them to become more interesiting to me, either profits need to go up or the price needs to go down. As they do have quite some EM exposure there is currently not much short term upside for earnings, so the only way to buy this would be a lower price.
At what price would I be interested ? Instead of a very detailed CF model, I rather try to go for a “common sense” approach here:
On average, Vetoquinol traded at ~14 xP/E since IPO, within a range of 8-17. I would want to buy them at a disocunt to average, so maybe 12-13. So with current earnings of 2,25 per share and 3 EUR net cash, I would be a buyer in the 30-32 EUR per share range. I think at that entry price, Vetoquiol could be a good 15% p.a. long term “Boring” compounder. However at the current 38 EUR per share this would mean that the stock price has to fall -20 to -30 percent to get me interested.
So again, a stock for my watchlist, next to Svenska Handelsbanken.
PS: Some research links: