85 Million & Climbing: Why Pets = Profits for These 6 Companies

pet stocks - 85 Million & Climbing: Why Pets=Profits for These 6 Companies

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In the U.S. alone, according to the U.S. Census Bureau of the U.S. Department of Commerce there are 120 million households. And of those households, 85 million of them have at least one pet according to the American Pet Products Association (APPA). By the math, that’s 70.83% that include dogs, cats and other nonhuman family members that are loved by their pet parents — and a reason to watch pet stocks.

To put this into perspective, according again to the U.S. Census, there are fewer households with children in the most recent annual survey data. Think about that. More folks have a furry (or otherwise) family member than a progeny.

That greater number of pet populated households makes for a big and rising number in pet-related spending that is rivaling that of childcare. According to the APPA, pet spending for 2020 is projected to come in at $99 billion up from $95.7 billion in 2019 and $90.5 billion in 2018 representing a climb of 9.39% in just two years alone.

Some of the major breakouts of that spending, as tracked by data analyzer Nielsen (NYSE:NLSN) as well as APPA and the American Veterinary Medical Association (AVMA), include food at $38.4 billion; supplies $19.8 billion; veterinary care at $30.2 billion as well as other spending on things like grooming at $10.7 billion.

And at the vet, one of the most dreaded places on the planet for most dogs, the average spending for procedures for dogs comes in at $426 and routine care at $212. This adds up over any given year. The American Society for the Prevention of Animal Cruelty (ASPCA) estimates that the average annual cost for caring for a dog costs parents as much as $1,843.

Love & Money & Pet Stocks

All of this continues to be well-known to me, and not just in terms of caring for my miniature dachshund Blue — but for a collection of companies inside the model portfolios of my Profitable Investing. The pet care market continues to be a big-growth sector that shows resiliency even during some of the most challenging economic ties such as for Covid-19-laden 2020.

A chart showing the FactSet Pet Care, S&P 500 and the S&P Health Care Indexes Total Return from 2016 through 2020.
Source: FactSet Pet Care, S&P 500 & S&P Health Care Indexes Total Return — Source: Bloomberg

FactSet Research Systems (NYSE:FDS) is a global economic and financial data company. And it has composed and maintains its Pet Care Index which tracks the leading pet stocks. Its index has returned 170.03% over the past five years – which is way better than the basic S&P 500 Index and the S&P Health Care Index total return for the same time period.

And it gets even better for 2020. The Pet Care Index has returned 47.79% year to date — which dwarfs the S&P 500 Index’s return of 15.34% and the Health Care Index’s return of 10.99%.

And despite the continued outperformance, the average price to sales ratio of the Pet Care Index is only 2.44 times which is at a discount to the price-to-sales ratio of the tech-heavier-weighted S&P 500 Index’s 2.71 times. This means that while pets rule the market and the economy, the companies serving them, and their parents are still values.

One of the leading pet stocks is Nestle (OTCMKTS:NSRGY), which is one of the leading pet food and related product companies in the world. Its pet care products, which make up 15.08% of overall sales, are up by 5.25% in just the most recent reported quarter alone.

A chart showing the Nestle (NSRGY) stock price from late 2019 to late 2020.
Source: Nestle (NSRGY) – Source: Bloomberg

The shares have returned 379.13% since being added to the model portfolios of Profitable Investing. It continues to be a buy in a taxable account.

Also, in the model portfolios, is Zoetis (NYSE:ZTS), which is a class-leading animal health and vaccine company with major problem solution capabilities including solving for animal-to-human virus vaccines. Its revenues continue to climb with the compound annual growth rate (CAGR) running at 7.37% over the past five years — proving itself for investors.

A chart showing the Zoetis (ZTS) stock price from late 2019 to late 2020.
Source: Zoetis (ZTS) – Source: Bloomberg

It has returned 59.02% since being added to the model portfolios of Profitable Investing, which is nearly double the return of the S&P 500 Index for the same recent period of time. It is a buy in a tax-free account.

Joining Zoetis in the pet and animal pharmaceutical products market is Merck (NYSE:MRK) in the Profitable Investing model portfolio focused on monthly dividends called The Incredible Dividend Machine.

A chart showing Merck (MRK) stock price from late 2019 to late 2020.
Source: Merck (MRK) – Source: Bloomberg

While animal health is a smaller percentage of its product revenues from human care, still it gets 10.13% of overall sales from our furry friends and that continues to climb reflecting the market trends. It has returned 61.91% since being in the portfolio and is a buy in a tax-free account.

Then we come to company that brings joy to the doorsteps of dogs on a daily basis — Amazon (NASDAQ:AMZN). You may not think of it as one of the pet stocks, but this is the company that provides the retail platform for so many pet products along with the evermore important logistical delivery capabilities that our pets depend upon particularly for this year.

A chart showing the Amazon (AMZN) stock price from late 2019 to late 2020.
Source: Amazon (AMZN) – Source: Bloomberg

It has been one of the stock market stars with a gain of 36.04% since being added in April to the model portfolios of Profitable Investing. It is a buy in a tax-free account.

Pets Schein On Profits

Now I come to a newer company with deep historical roots that is really in the thick of the pet care market and at the same time is a very under-valued stock in one of the bigger growth segments of the stock market right now.

The company has its origin story with a 1932 Columbia University College of Pharmacy graduate by the name of Henry Schein. He started his career with a pharmacy in Queens — but expanded it to provide dental supplies to dental offices far and wide. In fact, it is reported that Schein back in the 1980s had a sizable share of the dental market. 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, under the eponymous name of Henry Schein (NASDAQ:HSIC) continues today serving healthcare and dental practitioners.

His son would continue on his work, and later others would lead the company — but the model stayed and expanded. And eventually, Schein acquired Butler Animal Health which, under Schein and its relationship model, 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 (NASDAQ:CVET).

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 and Covetrus succeed.

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 having a regular reach 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 stand-alone offices to expansive chains.

Then like for everything else, software is one of the major drivers for greater efficiency for vets in managing everything from appointments and client management to marketing and communications. And just like for human health records, pet health records are fully digitalized on a cloud basis, 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. Thanks to the developments by the likes of Zoetis, Merck and others — animal drugs and treatment products continue to expand to provide longer and higher-quality lives of pets as well as livestock and horses. Covetrus continues to develop better and more competitive delivery of products.

The company has its own pharmacy and formulary facilities that maintain the highest industry standards for drug manufacturing under various licenses. It makes sure, based on ongoing needs, that vets have what they need on hand with controlled inventories at their offices. And for additional or special drugs, Covetrus has its own logistics systems that brings all of the major company products delivered same or next one-two day delivery.

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 parents might want to shop an online pharmacy to save money. But for Covetrus vet clients, the vet can provide similar if not cheaper prices and immediate or swift free delivery for clients, while also providing the vet with revenue from each pharmacy sale. I have seen this process in action, and it is not just a time and money saver — it gets my dog Blue what she needs now.

Covetrus Serves Shareholders Too

Revenue across its three primary business units of supply chain, software and prescription management continue to advance. Since the consolation to form Covetrus and listing of the company through 2019 to the most recent quarter – revenues are climbing by 26.55% on a CAGR basis.

A chart showing Covetrus' (CVET) revenue from February 2019 through September 2020.
Source: Covetrus Revenue – Source: Bloomberg

The company continues to evolve since its formation from the spin-off and merger, so costs are still a challenge, along with the competitive pricing for its services. So, while it has a long and proven history in this market, the company still in its current state is really new and its financials show some of the needed work on margins.

And the company has also been adding to its assets by 50.50% over the trailing four quarters as it keeps building up its business units.

But it has lots of cash, with its current ratio showing coverage of 160% of its liabilities out one year alone. And its debts are low for its segment in the medical marketplace at only 37.90% of assets. And it has been successfully obtaining credit through JP Morgan (NYSE:JPM) in private loans with excess capacity if needed through 2024.

The stock is very inexpensive, as it is priced at a discount to sales by 30%. And all of the business assets that the company has a history of making the most of are only valued in the stock by 2.41 times its intrinsic (book) value.

The stock was down leading into 2020 as being a smaller cap stock — it 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 100.45%, soaring well above the S&P Small Cap Index’s return of 3.92% and the S&P 600 Health Care Index’s return of 20.04%.

A chart showing the Covetrus, S&P Small Cap 600 and S&P 600 Health Care Indexes Total Return during 2020.
Source: Covetrus, S&P Small Cap 600 & S&P 600 Health Care Indexes Total Return – Source: Bloomberg

But remember even with the Covetrus shares performance so far, the shares are still at a discount to sales and at a modest price to intrinsic value — making for a value buy opportunity right now.

The shares do not yet pay a dividend – but given the cash generation capabilities for its market this has the potential to change. But for now, I see that this is a bargain way to further your investment in a very bullish market for pet care. It is a buy as I also have it in inside the model portfolios of Profitable Investing in a tax-free account.

About Neil George:

On the date of publication, Neil George did not hold (either directly or indirectly) any positions in the securities mentioned in this article. 

As the editor of Profitable Investing, Neil George helps long-term investors achieve their growth & income goals with less risk. With 30+ years of experience in the financial markets, Neil recommends undiscovered and underappreciated companies that offer subscribers double-digit yields now and triple-digit returns over time 

 


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