Buy the top dogs in pet products

Consumers who already spend billions annually on animals will drive this segment's revenues even higher.

By Traders Reserve Feb 19, 2014 10:11AM

Spoiled American Staffordshire Terrier © Randy M. Ury/Corbis
By Karen Riccio, Traders Reserve Traders Reserve

 

Investors trying to sniff out great stocks should track the $53 billion pet products industry, which is growing by leaps and bounds.

 

Even with the overall economic recovery dragging, annual revenue for pet products and services is expected to grow 4.4  percent through 2016 (one of the few industries that can say so).

 

The number of pet owners is growing, especially among singles and the elderly. That trend expected to continue for at least another five years, meaning this booming retail sector may provide some of the insulation investors need while the market shakes out.

 

We're not just talking dog food.  Billions of dollars are spent annually on everything from specialized food and spa treatments to designer clothes, outdoor gear, toys and veterinary supplies and services.

 

Big brands jump in 

As the recovery takes hold, household disposable income will rise even faster, and spending on pets is expected to pick up even more.

 

A wide range of companies has jumped into the market with pet shampoo, clothing, toys and gourmet treats -- Paul Mitchell, Omaha Steaks, Origins, Harley-Davidson (HOG)

and Old Navy, to name a few.

 

However, most of the money spent on pet products will funnel into pet supermarkets, mass merchandisers and large retailers. In fact, two national retailers account for more than half of last year’s $53 billion in revenue.

 

Here are three stocks in the pet-products industry that are best-of-breed and should be highly rewarded this year: 

 

PetSmart (PETM

Although shares of this $6.7 billion retailer of pet products and services have fallen 18 percent since hitting its 52-week-high on Oct. 1 -- due to weak holiday sales and a cut in fourth-quarter guidance -- PetSmart has a strong foothold in the industry as one of the two national retailers. In fact, the short-term drop in price makes PETM quite a bargain at $67.92.


The stock currently trades at just 16.1 times its trailing earnings per share (EPS) of $3.99. Over five years, its average EPS is 18.9, making PETM relatively cheap today.

 

As a business, none of its competitors offer the scope of products and services both in-store and online that PetSmart does. Its 1,314 stores provide pet staples from three categories: consumables include pet food, treats -- premium and super-premium -- and grocery stores do not carry many of them. PetSmart stores also sell hard goods such as leashes, health-care items, grooming aids, toys, beds and live pets.

 

Finally, the services segment includes full-service grooming, training and boarding at PetsHotel. PETM also has a 21 percent  equity stake in Banfield Pet Hospital. PetSmart’s total third-quarter net sales rose 4 percent  year-over-year to $1.7 billion, benefiting from strong demand for natural foods, grooming services and PetsHotels.

 

Comparable store sales grew 2.7 percent. The merchandise, services and other segments saw sales increases of 3.9 percent, 5.2 percent and 7.4 percent, respectively, to $1.50 billion, $184.2 million and $10.5 million. Net income grew 12 percent to $92.2 million. Privately owned PETCO is the nation's second to top dog in pet product retailing and PetSmart's largest competitor. 

 

PetMed Express (PETS

Of the $55 billion forecast to be spent on pets this year, more than $27 billion is expected to come from vet services and medications alone, according to data from the American Pet Products Association.

 

A top player here is PetMed Express. Drawing from a business model like 1-800-Flowers (FLWS), PetMed operates as 1-800-PetMeds, selling prescription and over-the-counter medications and other products primarily through its website, where 80 percent of the company’s sales are generated. This allows PetMed to cut out the middleman for its more than 7 million customers and sell supplies for up to 20 percent cheaper than other retailers. Plus, PetMed sells health products, toys and treats with the convenience of delivery right to your door. This model has been a winner since 1996 when the company single-handedly dissolved the pet medication monopoly.

 

This makes PetMed Express a great companion for any investor’s portfolio. The cash-rich company has increased its dividend by 70 percent since 2009 with its most recent 13 percent hike coming last November. PETS delivers a 5.1 percent yield and finished 2013 up 48 percent. Its customers are loyal, as illustrated by consistently rising reorder sales.

 

With plans to expand its pharmaceutical line, PetMed Express will be in a better position to compete with PetSmart. At $13.53 per share and trading at 15 times earnings, PETS is quite the bargain, especially when you consider that its closest competitor, $2 billion MWI Veterinary Supply has a P/E of 24 at $157/share without dishing out even a penny dividend. At this low share price you also get a company with $42 million in free cash flow that carries no long- or short-term debt, basically guaranteeing the continuation of hefty dividends.

 

MWI Veterinary Supply (MWIV)

 

MWI Veterinary is a distributor of animal health products to veterinarians in the United States and United Kingdom.

 

Because of a network of distribution centers, the company can deliver 98 percent of orders on the same day, a major reason behind a 121 percent increase in sales over the past four years. MWI’s first quarter fiscal 2014 revenue grew 19.9 percent year-over-year to $683.3 million. Internet sales to independent veterinary practices climbed 24.5 percent over the same period.

 

With a goal of strengthening its domestic market, the company recently acquired IVESCO Holdings, a key competitor, for $67.5 million. The acquisition will likely help MWI gain market share and bolster its pricing power against competitors in 2014, a year in which the company expects annualized growth of 23 percent to 25 percent. IVESCO will add about $400 million to revenues during the first year of the takeover.

 

Although the stock is up 25 percent over a year, shares of the $2 billion company have fallen 15 percent since hitting a 52-week-high on Jan. 31. The stock now trades at $157.


More from Traders Reserve 

 

3Comments
Feb 19, 2014 11:10AM
avatar

Hmmmm, very interesting..

Baby Boomers and their "left behind children."


And my Granddaughter, telling me: "Grandpa, dogs are the new Kids."

And she has had Vet Technician....training.

arf, arf, arf...

Feb 19, 2014 1:03PM
avatar
One can never go wrong with Milk Bones & pooper scoopers.
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