September 29, 2018 at 8:29 am #51867
Henry Schein’s Pet Dividend
Hedge fund manager Ben Axler’s cat recently died, the latest in a long line of pet felines. So his familiarity with America’s pet fancies is firsthand and helped him change his mind on a stock he initially thought might be a short sale. On Wednesday, Axler’s Spruce Point Capital Management issued one of its few Strong Buy recommendations, for the shares of the health-care supplier Henry Schein.
Schein (HSIC) plans to spin off its animal-health business and merge it into a fast-growing start-up that is helping veterinarians recapture the prescription sales that they have lost to online pet pharmacies. With investors eager for animal-health plays, Axler thinks the spinoff will unlock enough shareholder value to lift Schein shares 30% to 50% above their recent price of $85.
“People treat animals like parts of their family,” Axler says. With pet spending on the rise, veterinary stocks have done well. Pfizer(PFE) spun off Zoetis(ZTS) a few years ago. On Sept. 20, Eli Lilly(LLY) spun out Elanco Animal Health(ELAN). In the coming months, Schein will combine its veterinary-supply business, which provides equipment and drugs, with the privately held Vets First Choice, as a tax-free spinoff into a pure-play animal-health stock.
Axler mainly publishes short recommendations and says he started looking at Schein earlier this year because more than 10% of its shares had been sold short by investors who think the company’s traditional dental-supply business will lose share to Amazon.com(AMZN). (For another view of the pet business, see my colleague Vito J. Racanelli’s feature on pet insurer Trupanion).
But Axler got intrigued by Schein’s April announcement of a plan to team up with Vets First Choice, a start-up launched by founders of the successful veterinary testing company Idexx Laboratories (IDXX). Vets First Choice provides vets with a private-label website where pet owners can fill prescriptions. The vets get a cut, replacing drug-sale revenue that they have lost to the likes of PetMed Express(PETS).
In April Schein said the deal would yield a dividend of about $1.1 billion that it would spend on buybacks, acquisitions, and reducing debt. It is expected to file for the spinoff shortly; the deal could get done by year end.
The animal-health business at Schein is the No. 1 supplier to vets in the U.S. and Europe, accounting for 28% of the company’s 2017 revenue, or $3.5 billion. Because Vets First Choice is private, Axler and his colleagues surveyed veterinarians and scoured the internet to investigate the start-up. He figures that Vets First already has relationships with nearly 8,000 veterinarians. With Schein’s sales force behind the combined business, Axler thinks Vets First could quickly grab many of the 80,0000 practices that do business with Schein worldwide. Schein’s shareholders would own about two-thirds of the merged vet-supply enterprise.
“We wouldn’t want to be short a stock ahead of this catalyst,” says Axler. “The coming spinoff will unlock a whole new share buyer base for Schein, of people who just want to be in animal health.”
Write to Bill Alpert at email@example.com
Sept. 28, 2018 8:40 p.m. ET
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