It is always instructive to cogita...

It is always instructive to cogitation a company that has experienced a vast change in valuation by the market during a short time period. Veterinary Center of America, Inc. ("VCA") is single such company.

VCA is of particular interest because it was studied in the July/August 1994 issue of Canadian Shareowner. At that time the stock was trading at approximately $738 with A and B ballast prices of $18.31 and $778 respectively. Subsequently the stocks rose to a high of $30 in early 1996 and then declined sharply to the $8 flush in late 1996. These markedly changed valuations, as well as the fact that the stock more than met the re-study criterion of doubling in price in five years, have inspired this secondary illustrative study of one stock's investment potential. Editor

VCA is the largest, animalcompanion, health care organization in the United States. From the same hospital in 1987, VCA now operates a network of 154 full-service animal hospitals in 23 states (approx. 75% of revenues)

Hospitals exhibit general and medical and surgical services for small animals including dogs, cats, birds and other household darlings Specialized services include: internal medicine, surgery oncology ophthalmology, dermatology and cardiology. Certain locations also present grooming, bathing and boarding. In addition, to treating disease and injury, the hospitals emphasize favorite wellness through routine vaccinations, health exams, spaying and neutering and dental care.

VCA also operates 8 full-service diagnostic laboratories (25% of revenues) serving approximately 9000 animal hospitals in 45 states. These laboratories are among the largest in the U and perform diagnostic proofs including chemistry haematology, cytology, anatomical pathology as well as other disease-specific proofs

In 1993 the company began management of Vet's Choice - a joint risk (50.5%) with Heinz Pet performances ("HPP") to develop and market nutritionally-tailored nourishment for dogs and cats. In 1997 HPP assumed management of the hazard with VCA scheduled to provide management consulting services for a period of three years for an aggregate fee-simple of $15.3 million. Under certain circumstances, HPP and VCA may purchase the other's interest in the peril according to a specified valuation formula.

Total receiptss in the highly-fragmented U.S. market for veterinary services is estimated at $8+billion with through 16,000 hospital and approximately 40 laboratories. especially liked food sales are estimated at approximately $2 billion.

PROSPECT FOR events to come GROWTH IN SHARE PRICE

Historical receipts Growth During the last 10 years, VCA's return growth averaged about 50% by year; since 1993, growth has averaged through the whole extent of 80%. Reported revenues for the first half of 1997 were up 54% across 1996. Revenues for 1997 are exhibited to increase by approximately 30% to $240 million.

VCA's income growth is primarily the inference of acquisitions within the highlyfragmented veterinary care industry in the U A typical VCA acquisition involves a veterinary hospital or laboratory admited and operated by a single practitioner or small group of veterinarians. VCA purchases the practice for a combination of cash, promissory notes and VCA shares. Equally important, joining the VCA organization provides the veterinarian with a partner who can assist with acquiring strange equipment and management systems, training, and arranging for retirement/succession.

In 1996 VCA acquired the fondling Practice chain of 84 hospitals and the Pets' Rx chain of 16 hospitals.

Internal shooting in revenues is achieved on (i) increasing a veterinarian's productivity by dint of freeing him/her from administrative tasks and providing state-of-theart equipment and technical support; (ii) expanding available services and operating hours; and, (iii) marketing activities to attract strange customers.

A core strategy of VCA is to use its national port and name recognition to help expand its operation into other geographic areas and productions For example, animal hospital acquisitions may be exhibited with veterinarians whose first contact with VCA is within one of its laboratories.

Project income Growth

Future revenue development is expected from a continuation of the company's strategy of hospital and laboratory acquisitions and internal extension The company plans to acquire about 30 hospitals in 1998

VCA's ability to sprout revenues through acquisitions is dependant about the availability of funds to support increased purchases of assets.

Historically, VCA's asset pullulation (Chart 1) has outpaced its reward growth.

As a accrue every $100 of assets is popularly generating only about $70 of rewards instead of the moderately higher $80-$90 realized earlier in the subject of attention period (Chart 2). In part, this reduc efficiency of assets conclusions from the fact about $80 million of VCAs assets are in cash instead of assets that could generate hospital or laboratory incomes This situation represents excess capacity to generate to come revenue growth through improved asset utilization.

VCA has routinely issued equity shares and promissory notes to the proprietors of the hospitals and laboratories that it acquires. At the beginning of the meditation period VCA was using about $70 of fault to finance every $100 of acquired assets; now the company uses solely about $50 of debt for each $100 of assets (Chart 3) In part, this reduc reliance forward debt has been made possible by dint of the company's practice of retaining all of its earnings and not paying disclosed dividends (Chart 4).