The pet care industry went through a massive growth spurt during the pandemic when it seemed everyone had to own a companion pet. This lit a fire under pet care stocks.
Sadly for the animals themselves, adults have grown tired of the idea of pet ownership or can’t afford the ongoing costs, and this has led to euthanasia rates across United States animal shelters reaching a three-year high.
However, the pet care industry was strong before the pandemic, and it will be strong after, as irresponsible owners are replaced with true animal lovers who understand the responsibilities involved in owning a pet.
Food, vet visits, playtoys, etc., will continue for most of the 85 million families that own some kind of pet in the U.S. These owners spend an estimated $99 billion annually on their pets. I do not doubt that it will continue to grow.
Here are three pet care stocks that will benefit from this consistent growth.
Colgate-Palmolive (CL)
I was going to go with Nestle (OTCMKTS:NSRGY) as it owns the Purina brands, which include Pro Plan, Friskies, Fancy Feast, and Dog Chow, as well as a minority stake in IVC Evidensia, an owner of more than 1,500 vet clinics in Europe. However, then I remembered that all of my cats eat Hill’s Science Diet oral care kibble, which Colgate-Palmolive (NYSE:CL) has owned since 1976.
As a stock, Colgate has woefully underperformed over the past five years, gaining 30%, considerably less than the 84% return of the S&P 500. It’s time for reversion to the mean to kick in and send CL stock higher in 2024.
What’s been holding it back? It’s performed exceptionally well since hitting a 52-week low of $67.62 in mid-October. That’s partly due to the upgrade of its stock around that time by Stifel Nicolaus analyst Mark Astrachan, who moved it from “Hold” to “Buy” with an $81 target price.
It’s already hit the analyst’s 12-month target in less than three months. Should its momentum carry through 2024, $100 or more is definitely in the cards.
Through the nine months ended Sept. 30, 2023, Colgate’s Pet Nutrition segment had revenue of $3.18 billion, 20% higher than a year earlier. It accounted for 22% of the company’s overall revenue and 17% of its operating profit.
In September 2022, it paid $719 million for Red Collar Pet Foods, which operated three dry pet food manufacturing plants in the U.S. This is part of its plan to grow the Hill’s business. That should help the pet care segment contribute more to Colgate’s business.
Pet Valu Holdings (PTVLF)
I am not a fan of Chewy (NYSE:CHWY) because even though it’s an online dynamo in pet care, it does not know how to operate its business profitably. Our local PetSmart is unbelievably well-run that it makes me wish the company was publicly traded. Alas, that’s not the case.
So, I went with the Canadian option and Pet Valu Holdings (OTCMKTS:PTVLF), the Toronto-based operator of 225 company-owned and 541 franchised stores across Canada.
In the first nine months of 2023, it opened 22 new stores and renovated, expanded or relocated another 29. That’s a little shy of its goal of 35-40 for 2023. It opened 18 net-new stores in 2020, 28 in 2021, and 45 in 2022. There was also the acquisition of 66 franchised stores operating under the Chico banner in Quebec.
The company’s growth plan is based on three ideas.
The first is to grow the store count from 766 today to more than 1,200 in the future. The second is to continue to drive same-store sales growth. In the latest quarter, it was 4% higher year-over-year. Finally, through the modernization of its systems, the plan is to improve the company’s operating margins. It’s got some work to do. In Q3 2023, its operating margin was 14.3%, 340 basis points less than a year ago. Lower gross margins didn’t help the situation.
Based on its full-year earnings per share guidance of at least $1.60, it trades at a reasonable 18 times earnings. Down 27% over the past year, now is an excellent time to buy into Pet Valu.
Idexx Laboratories (IDXX)
As its investor relations website states, “Idexx Laboratories (NASDAQ:IDXX) is a global leader in veterinary diagnostics, software, and water microbiology testing.”
The company has three operating segments: Companion Animal Group (92% of revenue), Water Quality Products (5%), and Livestock, Poultry and Dairy (3%). Not only does the companion animal business generate most of its revenue, but it also accounts for most of Idexx’s operating profits.
Of the companion animal revenues in Q3 2023 ($837.2 million), 88% is recurring, which is best because it leads to higher operating margins. In 2023, it expects to grow its operating margin by 370 basis points at the midpoint of its guidance to 29.7%.
All of this should lead to earnings per share of $9.82, which is 56 times earnings. However, despite the nosebleed valuation, it was considerably higher in June 2021 when IDXX traded at more than $700. Back then, investors paid upwards of 76 times earnings to own its shares.
Best of all, Idexx’s balance sheet is pristine. At the end of September, its net debt was $809 million [total debt of $1.14 billion less cash of $332 million] or less than 2% of its $46 billion market cap.
In 2024, if interest rates don’t come down, Idexx won’t care. It has almost no leverage. That’s my kind of company.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
