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Pets and Vets: Investment Returns from our Animal Companions: Part 2

|Includes:LLY, MRK, MS, NVS, Pfizer Inc. (PFE), SNY
Annual spending on pet food, pet supplies and veterinary care is estimated to grow over 5% in 2011 to nearly $51 billion per year in the U.S., according to estimates from the American Pet Products Association. Pure-play publicly traded companies and large-cap companies with significant animal companion economic exposure have been identified in a recent Wall Street Transcript report.  

Veterinary medical goods and services include pharmaceuticals intended for animal use.  Many publicly traded large-cap pharmaceutical companies have significant divisions investing in this sector.  Eli Lilly & Co (NYSE:LLY) established its Elanco Pet division in 2007. The Elanco Pet subsidiary specializes in animal companion medicine distribution and development, and it has released two new products in the United States since 2007, one for flea control and the other for separation anxiety in dogs.

Similarly, Novartis (NYSE:NVS) has its Novartis Animal Health division, Pfizer (NYSE:PFE) has its Pfizer Animal Health division and Merck (NYSE:MRK) its Merck Animal Health Division.

Pfizer currently has a dividend yield of nearly 4%, and the stock is at $21 per share, trading 26% above its 2011 low. The Animal Health division may perhaps provide a significant hedge against the continuing patent cliff concerns surrounding the company. However, even though the Animal Health division had $3.5 billion in sales last year and is on track for over $4 billion in sales in 2011, this is still less than 6% of over $70 billion in annual sales at Pfizer and will not replace revenues lost due to the Lipitor patent expiration.

At Merck (MRK), Q3 revenues at the animal health division were 20% higher than the previous year, with $826 million in sales, representing almost 7% of Merck’s Q311 revenues. Merck’s product offerings, particularly in companion animal vaccines, continue to attract investor interest, and the stock is at its 12 month high, at over $36 per share and currently yielding 4.7%.

But while these divisions’ sales and growth seem impressive, they are not large enough to warrant investing into the parent company. Additionally, the sector is facing turmoil as Morgan Stanley (NYSE:MS) failed to pull off a merger of the animal health divisions of French pharmaceutical Sanofi Aventis (NYSE:SNY) and Merck (MRK) earlier this year. The deal was called off because of antitrust concerns and creates a legal block to further consolidation in the sub sector.  

Morgan Stanley (MS) is currently trading at slightly over $15 per share, off over 50% from 2011 highs.

Investors can look to other pure-play companies in the space, but many pet food companies are either privately held (Hartz Mountain, IAMs, Del Monte’s Meow Mix) or are a subsidiary of a much larger company, as is the case of industry giant Purina Pet Foods, now a division of Swiss food giant Nestle (NESN.VX).

Company Ticker Price [12/16] P/E Market Cap ($bln) Dividend Yield Sales ($bln.) Income ($bln.)
Pfizer PFE $21 17 162.3 4.3% 67.7 10
Novartis NVS $56 13 134.5 4.4% 51.6 10
Merck MRK $36 25 111.6 4.7% 45.9 1
Sanofi SNY $35 15 93.5 5.1% 42.1 6
Eli Lilly LLY $41 10 47.6 5.0% 23.1 5

The Pets & Vets report explores the investment thesis for these pure-play
animal companion goods and services companies in Part 3 of Pets and Vets:  Investment Returns from our Animal Companions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Part 2 of 3 part series titled:Pets and Vets: Investment Returns from our Animal Companions