How to Profit From Your Pets

In most animal-lovers’ homes, pets become instant members of the family and are refused no creature comfort… even in a recession.

In fact, the pet sector has managed to survive the financial crisis, with a few stellar companies actually flourishing in spite of it. Pet owners
are on track to spend $45 billion this year on their pets, a 5% increase from 2008.

What’s more, 81% of pet owners plan to maintain or increase their
pet-related spending, according to the American Pet Products Association.

It seems that tightened purse strings don’t apply when it comes to keeping our four-legged friends well-fed, groomed and cared for.

Here’s how to cash in on the trend with four well-positioned pet-related stocks…

Next – Pet Stock #1

Pet Stock #1 – MWI Veterinary Supply (MWIV)

Despite a low-spending environment, one facet that continues to see income is the health sector, and animals are no exception. MWI Veterinary
Supply (MWIV) distributes pharmaceuticals, vaccines, diagnostics, supplies and nutritional products
to veterinarians.

MWIV increased profits in the last two quarters by a margin that exceeded both industry and the company’s own estimates. A 19% growth in revenue
helped. This was thanks to new customer growth resulting from the company’s acquisition of substantially all of the assets of AAHA MARKETLink.

The future is bright for this animal medical distributor. Net income rose in the third quarter to $6.62 million or 54 cents per share, from $5.42
million or 44 cents per share in the previous year. And in April, MWIV signed a contract with Royer Animal Health to be Royer’s exclusive U.S. distributor,
marketing the company’s next-generation therapeutics to treat cancer and infections giving vets a localized treatment option for serious wounds.

I rate MWIV a B, or buy.

Next – Pet Stock #2

Pet Stock #2 – PetMed Express (PETS)

Another major player in the animal medical field, PetMed Express (PETS) is a retailer of prescription
and non-prescription pet medications, as well as other health products. Discount prices and convenience make this a go-to service for many pet owners.

PETM saw strong Q1 results, as revenue increased 13% to $77 million and net income grew 22% to $8.1 million. The balance sheet holds zero debt —
always a good thing.

One of the things I like about PETM is that the company acquired more customers this quarter and spent less to do so. It brought in 297,000 new
customers, compared to 267,000 from the same quarter a year ago, at a cost that was 12% lower. Now that’s the sign of a growing business.

This excellent customer growth without cost-cutting puts PETM at the top of my list. I rate it an A, or strong buy.

Next – Pet Stock #3

Pet Stock #3 – Central Garden & Pet Co. (CENT)

Central Garden & Pet Co. (CENT) is one of the largest suppliers of pet goods in the United States,
and its supply of higher-margin products makes it better able to withstand a recession. Everything from premium pet food to toys, pet carriers and
grooming supplies are marketed through CENT’s multiple companies.

While CENT’s target customer is more of a high-end client, a group that certainly dwindles in a soft economy, management has committed and succeeded
at cutting costs to make it through the recession with ease.

The recent earnings report reflects CNET’s success in reaching that goal. CENT increased operating income by 52% to $51.6 million, compared to 33.9
million in the year ago period. Net income for the quarter came in at $31.1 million, or $0.44 per fully diluted share, compared to the previous year’s
$0.22 per fully diluted share.

With growth tactics that are already showing results, I like the momentum CENT has going into the end of the year and especially the holiday season.

I rate CENT an A, or strong buy.

Next – PetSmart Is Thriving, But Don’t Jump in Yet

PetSmart Is Thriving, But Don’t Jump in Yet

If you have a furry friend at home, chances are you’ve been to PetSmart (PETM). The retail giant
has cornered the pet market, with more than 1,137 stores in the United States and Canada, 152 in-store PetsHotels boarding facilities and Doggie Day
Camps, not to mention serving as the leading online provider of pet supplies and information.

First-quarter revenue increased 9% to $1.3 billion, and net income grew 12% to $46 million. All told, PETM has ascended 26% in 2009, thanks to an
increasing number of stores and a focus on more profitable lines, including orthopedic beds and pet cookbooks.

PetSmart is due to report Q2 earnings Wednesday, August 19, after the market closes. The current consensus of the 15 Wall Street analysts who follow
the stock is for earnings of 29 cents per share. I actually expect a bit higher from PetSmart, probably 30 cents per share or more.

Why am I expecting a slight earnings surprise? In May, the company said to expect second-quarter earnings in a range of 26 cents to 30 cents per
share. Companies typically like to low-ball these estimates so they can later “surprise” investors with good news. That tactic is as common on Wall
Street as pinstripe suits.

Also, PetSmart recently increased its dividend from three cents per share to 10 cents per share. That’s an increase of 233%. I doubt the board would
approve such a big increase if the company wasn’t doing well.

We should also remember that PetSmart has a nice history of beating Wall Street’s expectations — PETM has now met or beaten earnings for nine straight
quarters.

Still, I give PetSmart an overall C rating, which signifies a Hold. If you already own PETM, I don’t recommend selling it. However, if you’re looking
to buy the stock, I don’t suggest jumping in just yet. While PetSmart’s financial stats, like sales and earnings growth, rate well, I’m concerned
about the stock’s quantitative weakness, meaning its price and volatility trends. The shares are basically where they were in late-March, even though
the overall market is much higher. This lack of relative strength is troubling, and until we see improvement here, I suggest you don’t make any new
purchases of PETM.

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