Big investor's sell-off spooks shareholders in veterinary firm.

VCA Antech Inc., the national operator of animal hospitals and laboratories, is learning the hard way what happens when the smart money exits a stock.

Two months ago, the Los Angeles-based company's biggest investor, buyout firm Leonard Green & Partners, sold off its remaining stake to Goldman Sachs & Co., more than tripling its original investment.

Many of those 3.2 million shares were then sold to the public in early August. The sales coincide with a decline in the stock to $40.50 on Aug. 18, from a 52-week high of $46.04 on July 20.

The broader market has declined in the same period, but Anton Hie, an analyst with Jefferies & the extra supply of stock was a factor in

At William Blair & Co., analyst Ryan Daniels agreed. "It always puts pressure on a stock when a big investor sells," he said.

But VCA is not the type of company to roll over and play dead.

The board responded by declaring a 2-1 stock split, effective Aug. 25, in an effort to attract more investors. Management also raised its 2004 outlook for sales and profits.

The company is in the process of digesting the acquisition of the nation's No. 2 animal hospital operator, National PetCare Centers Inc., in a $76.5 million deal that will be slightly additive to 2004 earnings. In the process. National PetCare, with 69 hospitals, will sharply increase VCA Antech's presence in California and Texas, its two largest markets.

VCA Antech's revenues and operating profits have grown at a compounded annual rate of between 14 percent and 18 percent over the last six years, primarily driven by price increases, new services and acquisitions.

Keeping profits up

Now the question is whether the company can maintain its double-digit growth and attract investors back to the stock. With the overall market in a downturn, some investors may wait for its shares to fall even further, perhaps below $36 a share, pre-split.

John Danhakl, a former VCA director and managing partner at Leonard Green, said several principals at his firm remain large shareholders with about 130,000 shares in their personal accounts.

Leonard Green, which took VCA Antech private in 2000 and then launched its IPO in 2001, has been a believer in the pet care segment. It still holds large stakes in Petco Animal Supplies Inc. of San Diego and Phoenix Scientific Inc., a generic animal drug supplier in St. Louis.

"The company has done well and the only reason (the stock) has been weak is the overall market has been weak," Danhakl said. "We believe in the management and the story."

Unlike human health care, veterinary medicine is a cash-based business with low working capital requirements, almost no bad debt expense and strong cash flows.

The American Veterinary Medical Association, an industry trade group, estimates that there are more than 70 million cats and 61 million dogs whose owners spend from $85 to $178 a year, or $17 billion annually, for medical services. Consumer spending on veterinary services has increased an average of 5 percent during the last five recessions.

Still, VCA Antech's earnings increase slowed in the second quarter, to 18 percent from the like year-earlier period. In the first quarter, earnings were up 184 percent compared with the like period a year earlier.

Robert Antin, VCA Antech's chairman, president and chief executive, told analysts in a second-quarter conference call in July that the company's laboratory business and hospitals both saw an unexpected slowdown in same--store sales.

"During the quarter there were two weeks, which we're unsure of why, in the marketplace, where animal hospitals slowed and so did the lab," he said, adding, "I think it was more of an aberration, and the revenue of the lab is continuing to grow nicely."

One question is whether the company is experiencing a slowdown at its diagnostic laboratories. the high-growth part of its business. VCA Antech's 23 labs are seeing increased competition from two upstart manufacturers, Idexx Laboratories of Westbrook, Maine, and Abaxis Inc. of Union City, Calif., which sell diagnostic equipment such as blood testing systems directly to veterinarians so they can test in-house.

The lab business has grown at a compounded annual growth rate of between 15 percent and 23 percent since 1998.

YEAR (Dec. 31)
                                 2003       2002

Revenue (millions)             $544.7     $480.9
Total Expenses (millions)       443.3      402.3
Operating Income (millions)     101.4       78.6
Net Income (millions)            43.4       20.8
Earnings Per Share              $1.06      $0.56

SUMMARY

Business: Operator of animal hospitals
Headquarters: Los Angeles
CEO: Robert Antin
Market Cap: $1.65 billion
Dividend Yield: None
Total Liabilities: $498.3 million
P/E Ratio: 30
Long-Term Debt: $394 million

[GRAPHICS OMITTED]

Staff reporter Kate Berry can be reached at [phone], ext. 228, or at [e-mail].