I’ve been on something of a pet care tear since last week, and in addition to the two great pet care companies I’ve already talked about here, I recently found another company that is really in the thick of the pet care market.
It also happens to be a very undervalued stock with plenty of room to grow.
One of my friends and I were discussing the markets, and he drew my attention to a company that I was not familiar with: Covetrus (NASDAQ:CVET).
The company began in the Columbia University College of Pharmacy with a graduate by the name of Henry Schein. He started his career with a pharmacy in Queens but expanded it to selling dental supplies to dental offices far and wide.
In fact, Schein had a sizable share of the dental market in the 1980s. His business model was to call on local offices and set up relationships with dentists to provide consistent deliveries of supplies and equipment. His company, Henry Schein (NASDAQ:HSIC), continues to serve healthcare and dental practitioners.
His son continued his work, and now others lead the company. Eventually, Schein acquired Butler Animal Health, which became one of the largest veterinary products and service providers in the market. And after building the vet market and acquiring other firms, Schein spun off the Animal Health company and merged with Vets First Choice to form Covetrus.
A Veteran with Vets
The lessons learned by Henry Schein nearly a century ago continue to work well for Covetrus. It is all about providing vets with the products and services that they need when they need it and building and keeping the relationships to help vets thrive.
It starts with supplies. Just like for dentist or doctor offices, vets require all sorts of items ranging from the mundane to the critical. Covetrus provides needed goods on a continuing basis with easy additional orders as well as regularly reaching out to offices to make sure that all is well with their supply chain.
This also applies to equipment, from sonograms to examination tables and scales. And for larger ticket items, Covetrus also provides leasing and financing terms for vets from standalone offices to expansive chains.
Today, software is one of the major drivers of efficiency for vets in managing everything. And just like for human health records, pet health records are fully digitalized, and Covetrus provides the systems to make it all work and keep it secure.
But one of the more lucrative services comes from prescription medications. Animal drugs and treatment products continue to provide longer and higher-quality lives for our pets as well as livestock and large animals. Covetrus continues to develop reliable product delivery.
The company has its own pharmacy and formulary facilities that maintain the highest industry standards for drug manufacturing. It makes sure that vets have what they need with controlled inventories. And for additional or special drugs, Covetrus has its own logistics systems that brings all of its products to offices by Amazon-like delivery speeds.
It also links its software to provide updates and refill information to vets’ clients. But what is really impressive is that the company successfully beats third-party online pet pharmacies in price and service, providing a competitive edge for its vet clients.
If a pet needs a prescription, many owners might want to shop at an online pharmacy to save money. But for Covetrus’ vets, they can provide similar if not cheaper prices with fast delivery for clients while also providing the vet with revenue from each pharmacy sale. I have seen this process in action, and it’s not just a time and money saver. It gets my dog what she needs right away.
Covetrus Serves Shareholders
Revenue across its three primary business units — supply chain, software and prescription management — continues to advance. Since the consolidation to Covetrus and listing of the company through 2019 to the most recent quarter, revenues are climbing by 23.7% on a CAGR basis.
Covetrus (CVET) Revenue — Source Bloomberg
The company continues to evolve, so costs are still a challenge along with the competitive pricing for its services. And while it has a long and proven history in this market, the consolidated company is new, and its financials show some of the needed work on margins. But the company has added to its assets by 50.5% over the trailing four quarters, as it keeps building up its business units.
It has lots of cash, and its debts are also low for its segment at only 37.9% of assets. And it has been successfully obtaining credit through JPMorgan (JPM) in private loans, with excess capacity if needed through 2024.
The stock is cheap. It’s priced at a discount to sales by 40%. And all of the business assets are only valued in the stock by just under two times its intrinsic (book) value.
The stock was down leading into 2020 because it’s a smaller-cap stock and hasn’t yet built up its following in the financial markets. But on a year-to-date basis, the shares are beginning to get noticed. The shares have returned over 60%, soaring well above the S&P Small Cap Index’s loss of around 10% and the S&P Small Cap Health Care Index’s return of just over 2%.
Covetrus, S&P Small Cap & S&P Small Cap Health Care Indexes Total Returns — Source Bloomberg
The shares do not yet pay a dividend, but given the cash generation capabilities for its market, this has the potential to change. For now, this is a bargain way to further your investment in a very bullish pet care market. At current prices, CVET is a good buy for your portfolio.
Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine…one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.