One of the most common ways people took advantage of being at home so much during the pandemic was to adopt a pet. Pet ownership rose to 70% of U.S. households in 2020. That's up from 56% in 1988. It may help curb some of the mental health issues that resulted from loneliness and isolation. It will also lead to more spending.
One of the biggest beneficiaries should be Idexx Laboratories (IDXX 1.21%). The company offers veterinary diagnostic products for both household and farm animals, as well as software that helps vets run their practice. As you might expect, business is good. And although the stock is down, Wall Street has a price target that suggests a lot of upside ahead.
Image source: Getty Images.
Americans love their pets
It isn't just the number of pets we adopt that is rising. The amount of money spent on them is also up sharply. By treating our furry friends as a part of the family, we're more willing to spend on their comfort and care.
Caring for them is a lucrative business
That shift has business booming for Idexx Labs. But the 153% growth in revenue over the last decade is only part of the story. The company has ridden practice management software and a growing mix of consumables -- things like chemicals and bandages -- to significantly higher profitability. It's easy to see the impact by charting gross margins over time.
IDXX Gross Profit Margin data by YCharts
Analysts can't keep up with the growth
The continuously rising margins have left Wall Street trying to catch up. Since early in the pandemic, estimates for the current and following year's earnings have kept climbing.
IDXX EPS Estimates for Current Fiscal Year data by YCharts
That's why it's surprising to see the stock down almost 30% from its high. The median price target of analysts who cover the stock is $700. The highest is $750. That's 50% upside from the current price.
Focus on the long-term potential
Buying a stock and seeing it go up 50% in a year sounds great. But the real life-changing returns happen over a much longer time frame. Idexx has grown earnings about 15% per year for the past decade. If it can repeat that and trade at the current price-to-earnings ratio, the stock price would be $2,150 in 2032. That's more than 300% higher than it is now.
Of course that bakes in a lot of assumptions. And fulfilling that potential won't be easy. But the company has three important tailwinds filling its sails. Americans are adopting more pets. We are spending a lot more money on them over time. And Idexx's business is moving into higher-margin offerings. The combination makes it an easy stock to buy and hold for investors -- especially pet owners.
