1 Under-the-Radar S&P 500 Stock to Buy on the Dip

With the S&P 500 having advanced by about 23.7% year-to-date, deals among large-cap companies appear few and far between.

One stock that may be attractive, however, is Idexx Laboratories (NASDAQ:IDXX). This company specializes in veterinary diagnostic devices as well as poultry and livestock testing, among other animal-care essentials. Idexx also makes water testing supplies to monitor and maintain water quality.

Surprisingly, IDXX shares haven’t benefited from the stock boom that has taken place so far this year. In fact, shares of the company are down about as far as the broader market is up.

Why is Idexx Laboratories struggling, and will this animal care company be one S&P 500 value stock to buy while prices remain low?

Why Is IDXX Down More than 23% YTD?

The simple explanation for Idexx’s fall so far this year is that, like many companies, it experienced a massive surge in sales growth during the 2020-21 era that has since fallen off, making comps very hard to rival.

While this dynamic can be seen most readily among tech and eCommerce companies that profited from shelter-in-place orders and human medical companies that surged on increased demand, pet care companies saw a very similar growth cycle play out.

Despite Losses, Fundamentals Remain Strong

Even though the market has punished IDXX shares for flagging growth, the fundamentals of the underlying business remain compelling. Revenue growth, for instance, has remained steadily positive for all but one quarter in the last 10 years. While the rate of growth has slowed to between 6 and 7% on a year-over-year basis so far this year, Idexx Laboratories is still delivering a respectable rate of sales growth.

The same is largely true where net income is concerned. While Q2’s net income was down 9.4% year-over-year, Idexx re-established positive growth in Q3 by beating the year-ago quarter’s results by 9.9%.

Full-year 2024 projections as of the time of the Q3 earnings report suggested that earnings per share will rise 10-11% on a comparable basis.

Idexx Laboratories also enjoys healthy profitability that has gradually widened over the years. For the trailing 12-month period ending in Q3, net margin came in at 22.5%. Even with revenue growth slowing, this level of margin gives Idexx an excellent ability to capitalize on whatever sales growth it is able to generate going forward.

Idexx has even been working to strengthen its balance sheet by paying down long-term debt. In each of the last 13 quarters, the company’s long-term debt total has fallen on a year-over-year basis. The cumulative impact of this repayment has been to bring the total down from its peak of $900 million in 2020 to a much more modest $525 million as of the end of Q3.

Is IDXX on Sale?

At first glance, Idexx Laboratories stock doesn’t look like an amazing value. Shares are currently trading at 40.4x forward earnings, 36.4x cash flow, 21.3x book value and 3.7x expected earnings growth.

For most companies, these numbers could indicate overvaluation. In Idexx Laboratories’ case, however, they are actually somewhat low by historical standards. The current P/E ratio, for instance, is about as low as it has been since 2016.

Analysts also take a more positive view of IDXX’s pricing. The median target price of $490.50 per share implies an upside of 16.5% from the last close of $420.91 per share.

Even more positive is the fact that the lowest standing price target is $435 per share, still more than 3% above the most recent close.

Where Will Idexx Stock Be In The Next 5 Years?

In the coming 3-5 year period, analysts expect to see Idexx’s EPS grow by about 13.9% annually. This growth rate, assuming it remains more or less steady, could go a long way toward allaying fears related to Idexx’s valuation.

Investors may also continue to benefit from Idexx’s share buyback program. In Q3, for instance, the company repurchased about 459,000 of its own shares at a cost of about $225.2 million.

With the exception of a brief period in 2021, Idexx Laboratories has been steadily bringing down its share count for many years. Since 2014 alone, the number of outstanding shares has declined from 102 million to 83 million.

Of course, Idexx isn’t without its potential problems. One major risk Idexx investors could face is an ongoing headwind from the strength of the dollar.

As of Q3, international revenues accounted for a little under 35% of total net revenues. A stronger dollar may well reduce the value of these international sales and put additional pressure on Idexx’s growth rates.

Is Now the Time to Buy IDXX?

Although Idexx does trade at fairly high valuation multiples, the quality of the underlying business seems to justify a premium price tag. This is particularly true when one considers that even today’s high multiples are low by the standards of IDXX, showing that the stock can support higher price multiples for long periods of time.

The company has an excellent combination of growth potential, profitability and strong financial discipline working in its favor. The continued repurchasing of shares will also likely benefit shareholders by supporting higher prices as the years go on.

Underpinning all of these characteristics is the fact that Idexx Laboratories enjoys a very strong competitive position. The company accounts for about 30% of America’s veterinary lab testing services industry, providing it an excellent moat.

Furthermore, the company is likely to benefit from long-term companion animal spending trends. Consumers are not only spending more on their pets than ever before, but improved pet food nutrition is beginning to lead to longer lifespans. This, in turn, increases the amount pet owners spend on veterinary services across their pets’ lifetimes.

Cumulatively, Idexx has excellent fundamentals, a strong position in a growth industry and pricing that, if not exactly undervalued, makes its stock a probable fair value.

All things considered, IDXX looks like it could be a decent buy for investors with long time horizons who are willing to allow steady growth to generate stable returns. Idexx Laboratories may not surge upward, but there seems to be room for multiple years of respectable upside ahead.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.