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Pets and Vets: Investment Returns from our Animal Companions: Part 1

|Includes: COST, LLY, MRK, NVS, PETS, Pfizer Inc. (PFE), TGT, WMT
Annual spending on pet food, pet supplies and veterinary care is estimated to grow over 5% in 2011 in the U.S. to a nearly $51 billion per year industry sector, according to the American Pet Products Association. How can investors profit from people’s love for their animal companions?

The growth in the animal companion marketplace has driven an interesting valuation cycle for companies in this business. Investors can gain exposure to the growing demand for pet products in two ways: pure-play publicly traded companies and large-cap companies with significant animal companion economic exposure, both recently identified in a recent  Wall Street Transcript report.

There are three industry subsectors: pet food and supplies, animal companion product retailers and animal health goods and services.

PetMed Express (NASDAQ:PETS) participates in two of these subsectors as an online retailer of animal companion pharmaceutical products. The stock trades at $9.80/share and offers over 5% in dividend yield. Investors should be cautious about this smaller company, however, as the consolidation of the animal health industry creates pricing pressure.  Edward Woo, an Equity Research Analyst with Wedbush Securities, put it this way:
“One of the significant changes we have seen for PetMed Express (PETS) and others is that many more retailers have gotten into the pet medication business. Before, about 10 years ago almost all pet medication was sold by the vets. You visited your vet, and you picked up the medication on your way out. Vets controlled the treatment and the maintenance of the animals. And because of that, they often controlled the dispensing of the drugs.

“The Internet started to change all that. You started to having companies like PetMed Express (PETS) enter the market. They looked around and realized they could sell the same medications a lot cheaper than what customers were getting from the vets, and that started to get people to start to buy medication away from the vets. It was a popular alternative because these medications can get expensive, so owners started to seek out other places to buy the same product. The next wave of change was with the general retailers. Now we have started to see nonprescription products show up in places like Costco (NASDAQ:COST), Wal-Mart (NYSE:WMT), Target (NYSE:TGT) or even the grocery stores and the smaller stores.”

Larger-cap pharmaceutical companies with significant health divisions perhaps offer better exposure to the animal companion market.   Companies such as Pfizer (NYSE:PFE), Merck (NYSE:MRK), Eli Lilly & Company (NYSE:LLY) and Novartis (NYSE:NVS) all have significant Animal Health divisions.. The Pets & Vets report explores this investment thesis and others in Part 2 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 1 of 3 Part series of articles: Pets and Vets: Investment Returns from our Animal Companions