InvestorPlace’s David Moadel recently covered the ProShares Pet Care ETF (CBOE:PAWZ), an ETF that tracks the performance of the FactSet Pet Care Index, a group of pet care stocks that look to benefit from an estimated $203 billion global industry.
As my colleague stated, I, too, find it strange that of the 2,100 ETFs that existed in 2019, there is only one pet care ETF listed in the U.S.
“The ETF market has absolutely exploded in the past several years. There’s an ETF for just about every niche market out there somewhere. But interestingly enough, until fairly recently, there wasn’t an ETF for the pet care industry,” Moadel stated June 10.
“That all changed in November of 2018 when ProShares introduced PAWZ, billed as ‘the first ETF that allows investors to capitalize on people’s passion for their pets.’ To this day, there’s really no other ETF that really captures this niche like PAWZ does.”
Amazingly, despite so many animal lovers, investors don’t seem to want to invest in the companies they use to keep their pets healthy and happy. While PAWZ has almost $70 million in assets under management, logic dictates it should have much more.
Heck, the US Global Jets ETF (NYSEARCA:JETS) has $1.5 billion in assets, and that industry’s getting scorched by the novel coronavirus. That said, I’m not suggesting JETS is a bad ETF. In fact, if you do want to bet on the airlines, it’s a safer play than putting your hard-earned money on a single airline.
But come on. How much more familiar could pet owners be than about pet-related products they use for their pets on a daily, weekly, monthly basis? Don’t you want to get some of your expenses back?
As a pet owner, I would love to be able to own a vet clinic to pay myself first for all the expenses I go through. So, why not do it through some publicly traded companies that make money from your pets needs?
- Zoetis (NYSE:ZTS)
- Freshpet (NASDAQ:FRPT)
- Idexx Laboratories (NASDAQ:IDXX)
- Trupanion (NASDAQ:TRUP)
- Covetrus (NASDAQ:CVET)
- General Mills (NYSE:GIS)
- Chewy (NYSE:CHWY)
Here are seven pet care stocks to buy from PAWZ’s portfolio of holdings.
Pet Care Stocks to Buy: Zoetis (ZTS)
In May, I included Zoetis in a group of seven stocks that I recommended due to their free cash flow generation. There are a lot of great names on this list. As for Zoetis, it grew its free cash flow by 9.4% annually from $1.12 billion in 2017, to $1.34 billion in 2019. In the trailing 12 months ended March 31, it had $1.32 billion in free cash flow and an FCF margin of 21%.
In the first quarter of 2020, Zoetis grew its sales 5% over last year to $1.53 billion, with a 36% increase in net income to $423 million. In good times and bad, most animal owners are darn good about providing whatever their pets need to remain healthy and alive.
That makes ZTS stock somewhat recession-proof. Over the past five years, Zoetis has an annualized total return of 22.7% through June 12, almost three times the entire U.S. market.
It’s a pet care winner.
If there’s a stock I wish I had known about when it went public, Freshpet would be it. Alas, I had seen Freshpet fridges where I grocery shopped but didn’t put two and two together when it listed its shares at $15 in 2014. I finally realized it was a public company when I bought its cat food for a finicky cat.
In 2020, FRPT stock is up by 45%. In the past five years, it’s got a total return of 321%. A $10,000 bet in shares at its IPO would be worth almost $55,000. That would have covered more than a few vet bills.
In fiscal 2013, before it went public, Freshpet had $63.2 million in revenue and a $12.3 million operating loss. In fiscal 2019, it had $245.9 million in revenue and a $253,000 loss from operations. In the first quarter of 2020, it had 27.9% sales growth to $70.1 million, and an adjusted EBITDA of $5.7 million, more than double a year earlier. In 2012, it had an adjusted EBITDA loss of $6.1 million.
Slowly, but surely, Freshpet is gaining traction and sales, and with that, GAAP profits are just around the corner.
Idexx Laboratories (IDXX)
While Idexx Laboratories isn’t quite as big as Zoetis — it has a $26 billion market capitalization compared to $63 billion — it’s still one of the world’s biggest pet-related healthcare companies.
Idexx reported its first-quarter results at the end of April. Sales grew by 9% during the quarter to $626.3 million and a 9% increase in earnings to $111.9 million, a 17.9% net margin.
Due to Covid-19, the company’s companion animal tests have seen a bit of a slowdown as fewer pet owners visit their veterinarians. That said, its companion animal group, which accounts for 88% of Idexx’s overall revenue, still managed to grow by 8.5% year over year in the first quarter.
In the trailing 12 months ended March 31, Idexx generated $290 million in free cash flow for an FCF margin of 11.8%. Anything over 10% is very healthy.
Idexx hasn’t got a lot of coverage from InvestorPlace writers in recent years. However, Josh Enomoto picked the company as one of 10 recession-resistant stocks to buy in January. Josh points out that millennials spend more on their pet’s health care than they do their own.
It helps explain why IDXX stock has a year to date total return of 21% and a five-year total return of 375.6%, even better than Zoetis’ performance over the same period.
Trupanion was another pet-related stock on Enomoto’s list of 10 recession-resistant stocks. Josh’s rationale was that acute issues with animals could be expensive. During difficult times where cash is tight, having paid for pet insurance in good times could be the difference between being able to afford treatment for your pet.
Over the past five years, Trupanion’s subscription revenue, which is the revenue it generates from writing its own insurance policies, grew from $133.4 million in 2015 to $321.2 million in 2019. It also makes money writing policies for other insurance companies. In 2015, these revenues accounted for 9.3% of its overall revenue. In 2019, that “other” revenue had grown to 16.4% of its overall sales.
On a GAAP basis, Trupanion still loses money. However, on an adjusted EBITDA basis, Trupanion’s fourth-quarter profit in 2018 was $407,000. In 2019, it was $1.7 million, and in 2020, it was $2 million, a 393% increase over two years.
Something to be aware of with Trupanion: the average pet acquisition cost (PAC) has been steadily rising over the past eight quarters. In June 2018, it was $150; in March 2020, it had risen to $247, which means it has to sign up more pet owners to make the same amount of money from its insurance.
That said, the pet insurance market is likely to continue growing, keeping TRUP stock moving higher.
The sixth-largest holding in PAWZ, Covetrus, was spun-off from Henry Schein (NASDAQ:HSIC) on Feb. 7, 2019. It then merged with Vets First Choice, who operates an online veterinary pharmacy along with a data analytics business, to begin trading on NASDAQ.
Since then, Covetrus has been on a roller coaster ride that’s seen its stock fall to as low as $4.04 in March before recovering nicely over the past two months. CVET stock year to date is up about 36%.
Investors and vets were divided about the merger. Vets thought Vets First Choice was a tech startup and a bunch of hustlers, while hedge fund managers felt the merged entity would be successful, operating in one of the hottest areas in the animal health industry.
In the eight months after the merger, CEO Benjamin Shaw stumbled and bumbled his way to significant losses. He stepped down on Oct. 22, 2019. Board chair Ben Wolin took over as interim CEO. Now the permanent chief executive, Wolin, has the company focused on its strengths: distribution, software, and prescription management.
In the first quarter, Covetrus saw sales increase 13.2% to $1.07 billion, while its pro forma adjusted EBITDA fell by just $2 million to $48 million.
Wolin has the business headed in the right direction. It is definitely the diamond in the rough of these seven companies.
General Mills (GIS)
Pet food is big business, which is why General Mills acquired Blue Buffalo Pet Products for $8 billion on Feb. 23, 2018. The move was meant to kick-start a business that hadn’t grown in recent years.
“The three most profitable aisles in the supermarket are beverage, snack food, and pet food,” Larry Light, a brand revitalization expert said at the time. “General Mills is under profit pressure. To me, it makes a lot of sense to get into beverages, snack food and/or pet food. In many parts of the world, people spend more per calorie to feed their pets than they [do to] feed their kids.”
In the nine months ended Feb. 23, General Mills generated revenues of $1.14 billion from its pet food division, 11.2% higher than a year earlier, The pet food division’s operating profit was $255.7 million, 61.5% higher than a year earlier.
While it can’t compare to the company’s North American Retail business — which accounts for 60% of sales and 72% of operating profits — it provides General Mills with a third profit generator that is growing much faster than any other division.
Blue Buffalo will continue to pay for itself for years to come.
I was reluctant to include Chewy in my list of pet care stocks to buy because it continues to lose money on a GAAP basis. However, on a non-GAAP basis, it had an adjusted EBITDA of $3.44 million in the first quarter ended May 3, a big improvement from an adjusted EBITDA loss of $15.77 million in the same quarter a year earlier. A non-GAAP annual profit is just around the corner.
In the meantime, Covid-19 has provided pet owners with a convenient way to get all of their pet’s needs without having to leave the house. As more people choose to work from home permanently, Chewy will become the online retail store of choice.
Scale is everything in online retail. In the first quarter, its sales grew 46% to $1.62 billion. The pathway to profitability seems all but certain thanks to the pandemic.
A year ago, I had some issues with buying Chewy stock in the first year of its IPO. However, I suggested investors consider buying some if it fell into the $20s after earnings in July 2019. It did, falling as low as $20.62 in November.
Now more than double that, and serious tailwinds keeping it moving higher, I think the long-term prognosis is excellent.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.