Americans’ love of pets is driving big revenues … pet investments are crushing the S&P … three ways to invest
What percentage of people would prefer to cuddle up with their pet rather than their life partner?
That would be a surprising (or perhaps not-so-surprising) 44%.
What’s the percentage by which owning a dog might decrease your risk of heart disease-related death?
About 36%.
And what percentage of pet owners are actually allergic to their pets?
10%.
Why are we starting today’s Digest with pet statistics?
Because 68% of U.S. households have at least one pet, which very quickly becomes “part of the family.” And when it comes time to nurture, provide for, and coddle this family member, we’re not shy about opening our wallets.
An article from CNBC found: “Owning a pet can cost you $42,000, or 7 times as much as you expect.”
This translates into big — and growing — profits for leading pet-related businesses … despite the financial distress many families are facing today.
On that point, here’s our income specialist and editor of Profitable Investing, Neil George:
Even in this economically challenged time, pet parents are not skimping on food or care, with Harris Polls reporting that 68% of owners are making no cutbacks when it comes to their pets, particularly their dogs.
With this in mind, in today’s Digest we’re sneaking a peek into Neil’s latest issue of Profitable Investing. In it, he highlights several stocks benefiting from our collective love of our little furry friends — with one in particular that’s already up 72% here in 2020, yet still trades at a huge valuation discount.
Let’s jump in.
***That adopted lockdown buddy can get expensive
During the height of pandemic lockdowns, animal adoption centers across the nation saw a surge in pet fostering and adoption rates.
From Fox Business Network:
Under normal circumstances, there are about 6.5 million companion animals that enter animal shelters nationwide every year, according to estimates from the American Society for the Prevention of Cruelty to Animals …
… but the ASPCA’s current data shows there has been a near 70 percent increase in animals going into foster care through the organization’s New York City and Los Angeles foster programs compared to the same period in 2019.
And despite the prolonged economic challenges facing Americans today, skimping on lockdown buddies doesn’t appear to be happening.
Here’s Neil, from his latest issue:
(Pet adoption) comes as economic distress rises in many households, with recent initial jobless claims rising again. The most recent weekly data showed in excess of 1.1 million newly unemployed, joining millions more with continuing claims.
Yet, the spending on pets in the US continues to rise. According to the APPA, spending for 2020 is projected to come in at $99 billion, up from $94 billion in 2019 and $90 billion in 2018, representing a climb of 9.4% in just two years.
Neil goes on to note some of the various sources of those dollars. For example, food expenses come in at $38 billion, supplies near $20 billion, veterinary care at $30 billion, and grooming approaching $11 billion.
Back to Neil:
This adds up over any given year. The American Society for the Prevention of Cruelty to Animals (ASPCA) estimates that the average annual cost of caring for a dog is $1,843.
CNBC puts some lifetime costs on pet ownership:
Even excluding expensive and unforeseen veterinarian visits, the likely cost of owning a dog through its lifetime … falls in a range of $27,074 to $42,545, depending on the breed …
The same expenses over a cat’s lifetime, as well as the added cost of cat litter, falls in the range of $21,917 to $30,942.
***How to turn these stats into investment profits
Let’s now turn to the investment implications of all this.
In Neil’s issue, he references FactSet, a data analytics company we often cite here in the Digest. It turns out that FactSet has created and maintains a Pet Care Index, which tracks the leading companies in the pet care market.
Back to Neil:
Its index has returned 117% over the past five years, which is way better than the basic S&P 500 Index and the S&P Health Care Index total returns for the same time period.
And it gets even better for 2020.
The Pet Care Index has returned 30.2% year to date, which dwarfs the S&P 500’s return of 6.5% and the Health Care Index’s return of 5.8%.
Despite the continued outperformance, the average price to sales ratio of the Pet Care Index is only 2.15 times, which is a discount to the price to sales ratio of the more tech-heavy S&P 500’s 2.28.
This means that while pets rule the market and the economy, the companies serving them and their parents are still values.
***What specific investments does Neil like for pet care?
There are many different ways to invest in the sector.
They differ by product or service — think “toys” versus “medical care” versus “food” versus “walkers” …
They also differ by revenues — for instance, a small pure-play pet company rather than a giant multinational with many divisions.
One such multinational that Neil recommends is Nestle (NSRGY).
Nestle is actually behind many of the most popular pet food brands in the market, including Purina, Alpo, Fancy Feast, Friskies, and Beneful, to name a few.
Back to Neil on how this impacts Nestle’s revenues:
Its pet care products, which make up 15.1% of overall sales, are up by 5.3% in the most recent reported quarter alone.
If you want a focused, pure-play pet investment, Neil likes Zoetis (ZTS). It’s a leading animal health and vaccine company — including animal-to-human virus vaccines.
Last year, it generated $6.3 billion in revenue across 300 different product lines, with 50% of that coming from pet products and 49% coming from farm animal products.
That’s helped translate into market gains. Below, you can see ZTS outperforming the S&P by 150% here in 2020, as of yesterday.
Neil likes ZTS under $163.75.
As a third, ancillary way to play pets, Neil points toward pharmaceutical company, Merck (MRK).
Back to Neil:
While animal health is a smaller percentage of its product revenues, it derives 10.1% of overall sales from our furry friends, and that continues to climb, reflecting the market trends.
Neil suggests Merck is a good buy up to $86.25.
***Neil’s latest Profitable Investing recommendation is a leading veterinary services company
From Neil:
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.
Neil goes on to highlight how this company has been enjoying 23.7% compound annual revenue growth from last year through the latest quarter … it has increased its assets by 50.5% over the trailing four quarters … it has plenty of cash, with its current ratio showing coverage of 160% … and best of all, it’s cheap.
Back to Neil:
It’s priced at a discount to sales by 40%. And all of the business assets are only valued in the stock by 1.95 times its intrinsic (book) value.
Amazingly, this low valuation comes despite this stock soaring 72% here in 2020. Neil calls it “a bargain way to further your investment in a very bullish pet care market.”
To learn more as a Profitable Investing subscriber, click here.
As we wrap up, let’s return to pet statistics …
The U.S. pet industry is expected to reach nearly $99 billion in sales this year. This comes as the amount of money Americans spend has more than doubled in 10 years. And with pet adoptions sharply higher due to the lockdowns, don’t look for these numbers to slow down.
Have a good evening,
Jeff Remsburg
