3 Industries Ripe for Profitable Returns
By IBISWorld Analyst Douglas Kelly
Ongoing macroeconomic uncertainty and market volatility continue to make it difficult for institutional and individual investors to assess their equities’ portfolio risk and identify attractive investment opportunities. While many investors focus on company-specific information or invest in broad-sector indexes, they may overlook the industry risks and conditions that affect company performance. Industry analysis improves investment selection by providing insight into a company’s future growth prospects and giving investors the ability to benchmark company financial performance against industry peers. Investors can then identify strong candidates by determining whether a company’s stock price reflects its potential and relative industry performance.
For this report, IBISWorld defines an industry with profit potential as one in a growth stage of its life cycle that has growing profit margins, high barriers to entry, low capital intensity, low to moderate concentration, a low level of competition and favorable demographic and social trends underpinning demand. An industry with at least three of these characteristics is likely to present investors with profitable returns. Using this top-down industry approach, IBISWorld identifies the Veterinary Services, Ambulance Services and Laboratory Testing Services as industries that are prime for profitable returns.
While industry analysis does not constitute a comprehensive investment approach, it does provide investors with a solid research starting point from which to begin a more rigorous analysis of investment opportunities and a framework for understanding external forces that affect these investment candidates. Investors that combine this top-down industry investment approach with a thorough vetting of company financials and operations can expect to better manage their equity portfolio risk and identify better investment opportunities.
The Veterinary Services industry (IBISWorld report 54194) is comprised of licensed veterinary practitioners that provide medical, dental or surgical treatment services to animals in the household, agricultural and government markets. The industry also includes establishments that provide laboratory and diagnostic testing services for licensed veterinary practitioners. Major industry players include VCA Antech Inc. and IDEXX Laboratories Inc.
Over the five years to 2012, IBISWorld estimates industry revenue increased at a 2.4% average annual rate to about $29.9 billion in the five years to 2012. Similar to healthcare industries, the necessary nature of veterinary services for domestic and livestock animals kept the industry insulated from significant declines during the recession. Continued growth in pet ownership and pet owners’ increasing willingness to pay for pet healthcare have been the key drivers of industry performance. According to the American Pet Products Manufacturers’ Association, about 72.9 million households (or 62.0% of the US population) own a pet. Pet ownership rates trended upward at a 1.2% average annual rate over the past five years, and the total number of pets per household increased as well.
Growth prospects for veterinary services are strong. Over the five years to 2017, IBISWorld projects industry revenue will grow at a 3.9% average annual rate to about $36.3 billion. Increases in pet ownership, escalating consumption of animal products and favorable legislation will drive this performance. Although not growing as fast as companion animal care, practices that serve large animals, public health and government markets will also present attractive growth opportunities due to rising consumer food safety and animal well-being concerns. The 2011 Veterinary Medicine Loan Repayment Program Enhancement Act will also support industry expansion by encouraging veterinarians to enter underserved practice areas through student loan repayment.
Furthermore, medical equipment, treatments and diagnostic tests are increasingly migrating from human healthcare into veterinary medicine to create higher-cost treatment options for pets and livestock that will boost average industry profit up to about 10.4% of revenue by 2017, up from 10.0% in 2012.
Industry operators are insulated from the traditional reimbursement risk typically found in other areas of healthcare. Nearly all veterinary service expenditures are paid for out-of-pocket, with only 1.0% to 2.0% of total expenditures derived from veterinary insurance. In total, the average dog and cat owner spends $137 and $112 per visit to the veterinarian, respectively. Expansion in pet insurance over the next five years, however, should grow the number of pet owners’ that can afford high-cost pet treatments.
Industry veterinary practices benefit from favorable industry characteristics, such as high barriers to entry, low concentration and pricing competition. For example, veterinary laboratories operate at a loss until testing volumes permit profitability, while veterinarians are required to obtain qualification from one of only 28 veterinary programs in the United States, which keeps the threat of new market entrants low and market shares stable. Despite high barriers to entry, the top four industry players only account for an estimated 8.3% of industry revenue, which presents industry operators with opportunities to gain market share through acquisitions and transitioning toward group animal-care practices that can offer enhanced services and achieve economies of scale.
The Ambulance Services industry (IBISWorld report 62191) includes private and municipal operators that provide ground or air transportation for patients, along with medical care. These services are often provided during a medical emergency, but they are not restricted to emergencies. The vehicles are equipped with lifesaving equipment operated by medically trained personnel. Notable industry players include Emergency Medical Services Corporation and Air Methods Corporation.
Escalating use of ambulance transportation for both emergency and nonemergency applications boosted industry revenue during the past five years. From 2007 to 2012, IBISWorld estimates industry revenue increased at a 4.6% average annual rate to about $13.5 billion. An aging population, increased outsourcing of emergency services to private companies and advancements in emergency-care technologies have been the key drivers behind strong industry performance. Fiscal shortfalls for state and local governments have pushed an increasing number of healthcare industries to outsource ambulance services to private companies. Furthermore, the development of certain stroke and heart-failure treatments, such as clot-busting drugs that can stop some heart attacks and strokes in progress, has helped lengthen the time from incident to treatment, permitting transportation to the hospital by industry operators. As a result, the number of patients arriving by ambulance at hospital emergency departments (ED) increased to 16.0% of total ED visits, based on data from the “National Hospital Ambulatory Medical Care Survey.”
Over the five years to 2017, IBISWorld expects the continued aging of the baby-boomer generation, rising obesity rates and the net benefits from healthcare reform to drive up industry revenue at a 5.8% average annual rate to about $17.8 billion. Higher obesity rates, and associated conditions, such as heart disease, stroke and type two diabetes, will drive consumer health spending and, consequently, demand for ambulance services. In addition, the number of public-private partnerships, where public providers of ambulance services (i.e. fire departments) engage private providers for a determined area, is forecast to rise in the coming years due to ongoing fiscal challenges for state and local governments.
Similar to other industries in the healthcare sector, profit for ambulance services fluctuated slightly over the past five years as some consumers struggled to pay for care. Still, average industry profit remains high at an estimated 8.1% of industry revenue. Additionally, the expansion of healthcare insurance coverage in the United States and increased funding for Medicare and Medicaid are projected to improve all consumers’ ability to pay for industry services over the next five years. By 2017, IBISWorld projects the industry’s average profit margin will climb to 8.7% of industry revenue.
Ambulance operators will also continue to operate in favorable industry conditions, such as high barriers to entry and a low level of concentration. Licensing and regulatory requirements act as a significant barrier to entry, particularly for providers of emergency services, which limits the threat of new market entrants. Additionally, IBISWorld estimates that the four largest industry players only account for 24.3% of industry revenue. Most ambulance services are highly localized and certain geographies are covered by operators with long-term contracts; however, some are beginning to realize cost savings by expanding into these local markets through acquisitions. This move enables firms to consolidate dispatch operations and reduce fleet purchasing and maintenance costs. Furthermore, public and private industry operators were able to offset higher expenses over the past five years by raising their rates and securing more federal funding. This trend indicates that many ambulance service providers retain pricing power for providing their services.
Companies in the Laboratory Testing Services industry (IBISWorld report 54138) perform physical, chemical and other analytical testing for commercial purposes in the product manufacturing, healthcare and government markets. The testing may occur in a laboratory or at the production facility. Most results from industry-led tests are checked against government regulations and environmental, industrial and product standards. Notable industry players include Intertek, Societe Generale de Surveillance and Underwriters Laboratories Inc.
IBISWorld estimates that over the five years to 2012, revenue for the Laboratory Testing Services industry grew at a 2.9% average annual rate to about $15.7 billion. Key drivers have been increased government regulations, particularly on the environmental impact of materials and production, along with higher corporate research and development (R&D) expenditures on new product development. Despite cutbacks in corporate spending during the recession, investment in R&D still increased at a 0.3% average annual rate over the past five years to about $228.0 billion in 2012, boosting demand for industry services.
Growing public awareness of health, safety and environmental issues will drive industry growth over the next five years. IBISWorld projects industry revenue to increase at an average annual rate of 7.4% to $22.5 billion in the five years to 2017. In addition, as new technological advancements are made in food production and mobile electronics, new testing procedures will be required and will further expand the range of industries for which laboratories provide testing. A more diversified customer base will help grow and stabilize profit margins to about 11.3% of industry revenue by 2017.
Industry players also benefit from favorable industry conditions, such as low capital intensity, high barriers to entry, low concentration and moderate competition. Initial capital expenditures on licensing, specialized testing equipment and facilities are high, limiting the threat of new market entrants. Still, the industry is largely labor intensive despite the continued mechanization of testing processes, making industry operating capital intensity low. Industry concentration is also low: IBISWorld estimates the four largest industry players account for only 15.3% of industry revenue. No industry player holds more than a 5.0% market share, indicating that the wide range of applications of laboratory testing services has not allowed dominant players to emerge and has kept competition levels low. This nature has, in turn, enabled industry operators to retain pricing power.
To download full research reports for the industries discussed in this article, click on the report titles below.
Veterinary Services, Ambulance Services, Laboratory Testing Services
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