One of the more unexpected market bubbles that developed from Covid-related easy money policies was the “pet stock” bubble. As people were stuck at home more often, they were more likely to adopt pets and spend more to keep them healthy. Thus, the stocks of companies related to pets were bid up to unsustainable heights.
One such stock was veterinary pharmaceutical company Heska Corp. (HSKA, Financial). This leader in advanced veterinary lab diagnostics and digital imaging was further boosted by a series of acquisitions and new partnerships that helped shares soar from around the $95 mark pre-pandemic to a high upwards of $267 before crashing to $73 as of this writing.
Now that the dust is beginning to settle, is Heska in value territory? The company has not come out of the last few years the same as it used to be. Its revenue has soared on an absolute basis, but has been more sluggish on a per-share basis due to net share issuances and the bottom line has turned negative after years of profitability. At the same time, it has demonstrated encouraging growth in its business, acquired new intellectual property and scaled up manufacturing capacity. To cap the success of these strategic growth initiatives, CEO Kevin Wilson has been buying shares recently.
CEO buying
One positive sign is that Heska’s president and CEO, Kevin Wilson, has been loading up on shares. He has been buying here and there as the stock has fallen, but on Jan. 6, 2023, he stepped up the pace, snapping up 11,018 shares at an average price of $58.62.
Previously, before Wilson began buying the stock as it fell, no insider had bought shares of the company on the open market since director Scott Humphrey in May 2019, according to Form 4 and other insider trade filings with the SEC.
There have not been any other insiders buying Heska recently, but Ray Dalio (Trades, Portfolio)’s Bridgewater Associates was buying shares in the second and third quarters of 2022, according to the firm’s 13F filings. The top guru shareholder of the stock is Paul Tudor Jones (Trades, Portfolio) with 0.25% of total shares outstanding.
Investors should be aware 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
A pathway for growth
Heska has embarked on a path of growth in recent years, sacrificing near-term profitability in order to scale up faster, acquire valuable intellectual property, improve manufacturing scale and expand internationally outside of its home market in the U.S.
In September 2021, Heska acquired majority ownership of Biotech Laboratories from Biotech Holdings U.S.A. This acquisition was focused on Biotech Laboratories’ intellectual property, including its rapid point-of-care tests to detect infectious and parasitic diseases in animals. The 65% stake cost Heska $16.3 million.
In January 2022, Heska acquired VetZ, a European company offering practice information management software solutions, in an all-cash deal valued at 30.6 million euros ($26.8 million). Over its 25-year history, VetZ has become known as the gold standard for veterinary health care information management software, used by more than 3,300 veterinary practices around the world.
Most recently, on Jan. 3, 2023, Heska acquired LightDeck Diagnostics for an approximate value of $38.7 million. This adds LightDeck’s innovative planar waveguide technology to Heska’s platform and also greatly expands the company’s manufacturing capacity through the newly-built Longmont facility, which is expected to go online sometime in 2023.
Acquisitions have helped Heska achieve a three-year revenue per share growth rate of 16% despite a three-year share buyback ratio of -11.8%. Earnings have turned negative for now, though the company should become profitable again once it successfully integrates its acquisitions and leverages its newfound economies of scale.
Fair value for the price
Despite making several major acquisitions, Heska still has a solid balance sheet with cash and cash equivalents of $161.1 million compared to total debt of $105.2 million. Even once the LightDeck acquisition hits with the company’s fourth-quarter earnings report, its strong financial position will not be shaken. This is a promising sign because it means the company has not overstretched itself and could still safely look for additional acquisitions.
It is tricky to value Heska because of its ongoing transformation process. However, the stock is trading lower than it was before it made its expansion into Europe via acquisitions, and as of the third quarter of 2022, international sales accounted for a third of the company’s top line. Heska has also developed and acquired new diagnostic tests, platforms and manufacturing facilities and has decent financial firepower to make use of these assets to scale up operations.
The GF Value chart rates Heska as a potential value trap, and while this may be in part due to the recent negative earnings, the GF Value algorithm also takes historical valuation multiples into consideration, so the bubble from 2020 and 2021 is skewing the results.
Analysts’ estimates are all over the place, with Morningstar (MORN, Financial) targeting earnings per share estimates of $1.05 for full fiscal 2023, while Yahoo Finance estimates average a loss per share of 15 cents.
In the longer term, the company will need to achieve earnings per share around the $3 to $4 range to be considered cheap on paper at current levels, but that is really only if it grows at a snail’s pace. The higher the growth rate, the higher the justified price-earnings ratio, though the market likely will not be willing to pay higher price multiples in the current risk-off environment.
The company itself says it is ready to transition from its “five-year build phase” to its “five-year win at scale and win innovation phase” phase in fiscal 2023.
Overall, given the risk-reward scenario, I think Heska represents fair value for the price. We do not yet know how well its efforts to scale up will transition to improvements in profitability, the market situation is unfavorable for growth stocks and the pharma industry is always at risk of unexpected disruption. The way the company has executed its five-year build phase is promising, though, as is the fact the CEO is putting his money where his mouth is.
