My Dog Has Turned Me Into a Jackass: 7 Companion Animal Stocks Worth Watching

by: Alan Brochstein, CFA

I spent over $600 at the veterinarian this week. On Monday, Cocobella got her normal annual vaccinations. Friday, she received her annual dental cleaning. Before you judge my actions, you have to see the subject:


The economics of pets amazes me. This beagle cost $150 (actually, it was a gift), but I figure it costs over $1000 a year to keep it fed and healthy. That doesn't include the repairs we had to make to woodwork around the house or the clothes and shoes that needed replacing when she was an insatiable monster cute little puppy. She survived and, like every other dog in my life, brings immense joy to me and my family that every dog owner can surely understand.

But what about the cost? I always have approached expensive things in life as potential investment opportunities. It worked for the health insurance companies, it worked for Coach (COH), etc. I am well aware of several companies that should benefit from the secular trend towards people spending a lot of money on their pets, though clearly the weak economy has put a dent in that theme. With that in mind, I wanted to share some investment highlights of the universe of 7 publicly-traded stocks that derive a great portion of their sales from companion animal spending.

Companion Animal Stocks
A few observations before some detail:

  • Generally, the group is cheap on a PE basis relative to the past several years
  • Despite the recession, 5-year growth rates are pretty high for most of these companies
  • The companies all generate good ROIC
  • Margins are expanding at the smaller companies

I have looked at all of these companies at some point over the last few years. The only one that I have owned of late is Abaxis (ABAX,) from which I was spooked right after I had just bought the stock before they reported after I heard the CEO on the Q1 earnings call. When describing some steps they were taking to improve their human testing business, he said something to the effect that they were going to start running it like a "real business". Not the kind of thing I like to hear, but I should have realized that he is somewhat of a loose cannon. I missed a quick double, though one of my clients stayed in the name. It was one of my worst moves in 2009 (after selling out ISRG at a 50% gain in the 140s).

Looking at them in order, Patterson (NASDAQ:PDCO) is a long-time distributor in the market, but it is not a big part of their business at 18% of sales and an even smaller percentage of profits. The rest of their business is primarily dental and then rehab equipment. This company is a case study on what happens to companies when they trash the balance sheet to do acquisitions in order to support an inflated valuation. I would title it "Turning Your Stock Into a Dog", but I digress.

Everyone knows Petsmart (NASDAQ:PETM), the retailer. I don't follow them that closely. The stock peaked in 2004 with a PE of 25X and has delivered 10% top-line growth (not bad) but just 9% growth in earnings (EPS boosted by share repurchases to 15%).

Idexx Labs (NASDAQ:IDXX) was pounded recently amidst seemingly minor FTC issues. This company makes instruments and consumables primarily for vets, but also has water testing and food production animal health lines. The GM is among the highest, signalling the lack of competition. The company is in an upgrade cycle as well. It's expensive, but it always is. The current valuation is median for the past decade.

VCA Antech (NASDAQ:WOOF) wins the best ticker award. It owns vet clinics (a neat roll-up business), offers testing and also has a technology division (digital x-rays and ultrasound). This one seems likely to snap back when the economy eventually recovers, but it suffers from a potential lack of acquisitions ahead due to its balance sheet being less-than-pristine. It has been allowing its ample free cashflow to boost its balance sheet (deleveraging) over the past year.

Abaxis (NASDAQ:ABAX) is one of the most interesting to me. Notwithstanding CEO Severerson's "talk first, think later" behavior when discussing a major strategic change, this company, which is focused on diagnostics for animals and humans, seems to have a better mousetrap. What really captured my attention was the higher gross margins and better balance sheet than IDXX. I have continued to follow this one from my watchlist.

MWI Veterinary Supply (NASDAQ:MWIV) is the one I know the least, though it seems to be working the best (approaching an all-time high). The valuation is lower than it has been traditionally and is certainly in line with its projected earnings growth rate. The company just announced a highly accretive acquisition in the UK.

The smallest of the bunch, PetMed Express (NASDAQ:PETS), is one that I have looked at recently. I am a former client, and I really like what they do (direct-to-consumer) and appreciate the challenges that they face in terms of getting the vets to cede business to them by giving customers the prescriptions. The stock is cheap (still), and the chart looks excellent. I have been nervous about this one, though, as their prices are much higher than at (NASDAQ:AMZN). I am not sure if AMZN will crush them or buy them, so I stay on the sidelines.

I think that some of these names are investable now, though a protracted weak domestic economy (kind of what I expect) could keep the lid on returns for a while. I believe that they do have somewhat defensive characteristics.

Disclosure: No positions