by Alyssa Oursler | August 19, 2013 2:43 pm
It’s no secret that people love their pets — but it might not be common knowledge that you can profit from it.
The Wall Street Journal’s Robert Sapolsky recently reminded us just how strongly most folks feel about their furry companions. For instance, in a recent study, 40% of respondents voted to save their dog over a foreign tourist. And for a more historical example, the Nazis had “strict laws that guaranteed the humane treatment of the pets of Jews being shipped to death camps.”
The puppy-love sentiment — as seen in these examples, or our deep hatred for Michael Vick, or our tears over that heart-wrenching Sarah McLachlan commercial — doesn’t just end at emotional response. It actually translates to big consumer spending.
In 2011, nearly three-quarters of U.S. households owned an animal, and America spent approximately $61.4 billion on their pets — an average of $500 on those pets throughout the year. Plus, that figure is actually much lower than many of us would expect because it factors in the cost of low-maintenance pets. (My parents’ puppy was sick last week, and his bill for one day in the vet’s office dwarfed that average).
No wonder, then, that these three pet stocks have been posting big returns of late:
Let’s start with those vet bills I just mentioned. Just about 30% of the spending in 2011 came from veterinarian services — a category listed separately from the medications often prescribed as a result of those services.
With that in mind, VCA Antech (WOOF) sure has a lot of promise. The company owns 600 small animal veterinary hospitals across the U.S. and Canada, boasts a nationwide clinical laboratory system and is a leader in animal diagnostic imaging.
That footprint has paid off. The stock has soared nearly 50% during the past 12 months, and has doubled the market year-to-date with 33% returns.
In the most recent quarter, VCA Antech posted record revenues and a 23% increase in operating income, and looking forward, there’s reason to think that upward trend could continue.
VCA is eager to keep expanding; it acquired MediMedia Animal Health and BrightHeart Veterinary Centers in 2011 and has an ongoing “hospital acquisition program.” Plus, the company — which has shown year-over-year sales growth in every quarter since 2009, the earliest available year for data from S&P Capital IQ — is slated to grow earnings by nearly 13% annually over next five years.
While many expected big things from Zoetis (ZTS) — a spinoff of Pfizer’s (PFE) animal health business — it turns out that supplying vets isn’t as good of a business (so far) as supplying pet owners directly.
PetMed Express (PETS) — known by many as 1-800-PETMEDS — is a licensed pharmacy much like Walgreens (WAG) and CVS (CVS) that offers all major brand medications for a cheaper price and delivered to your door. PETS has posted a similar climb to VCA, gaining 53% during the past 52 weeks and more than 33% year-to-date. Meanwhile, Zoetis is down a couple percentage points since its February IPO.
PetMed is slated to enjoy 5% annualized earnings growth over the next five years — which doesn’t sound like much, but is a vast improvement over its decidedly downward trend during the past five years.
Plus, PetMed Express offers investors another treat: a mouth-watering 4.5% dividend. The company began paying a 10-cent dividend in 2009, and has increased it by 70% since then to its current 17-cent payout.
In 2011, Americans spent more on pets than they did on alcohol, and spent more on pet food alone than they did on bread and cereal.
That doesn’t necessarily mean you should avoid stocks like General Mills (GIS) or Anheuser-Busch InBev (BUD), but it definitely means you should take a close look at PetSmart (PETM).
Back in March, I mentioned five reasons to love PetSmart’s stock despite its (at the time) recent underperformance. A few of them: its niche, recession-proof nature and strong growth prospects.
The stock continued to lag for the next month or so after I wrote the article, but since early April, PETM has more than doubled the broader market with a 20% climb. Also, PetSmart reports quarterly numbers Wednesday and is expected to report earnings growth of 21% for the most recent period — not too shabby.
I wouldn’t be concerned with competition from generalists like Walmart (WMT), Safeway (SWY) and Amazon (AMZN), or even PetFoodDirect.com. PetSmart also has training classes and boarding services, while rivals lack the scope on the sales end … and don’t allow you to bring Buster along for a field trip.
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.
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