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The dog days of summer are upon us. The stifling hot makes many people just want to stay inside and not venture out at all. The market is having its own version of dog days. The uncertainties around the world are causing many investors to avoid stepping out into the markets.
Perhaps the best approach for these dog days is to take a look at some dog stocks. No, not the so-called "dogs of the Dow" -- I'm talking about real stocks for the dogs. Let's take a look at two possibilities.
10,000 reasons for pets to like it
If you need something for your dog, cat, or nearly any other pet, odds are that PetSmart (Nasdaq: PETM ) has it. This specialty retailer's 1,241 stores across the U.S., Canada, and Puerto Rico carry around 10,000 different pet products. The company also offers a range of pet services including grooming, training, boarding, and even day camps.
If it hasn't been raining cats and dogs in your part of the country, it could be. The most recent survey of pet owners conducted by the American Pet Products Association (APPA) found that nearly 73 million U.S. households have a pet. The survey showed over 370 million pets in the U.S. (including 151 million freshwater fish).
PetSmart profits nicely from Americans' love for their pets. Last quarter's earnings were up 33.5% compared to the same quarter in the prior year. Earnings growth over the past three years averaged nearly 19% per year.
While PetSmart leads the pet products and services industry, it does have some big dog competitors. Wal-Mart (NYSE: WMT ) and Costco (Nasdaq: COST ) sell many of the same types of items. However, these large chains typically don't carry premium pet brands like PetSmart does due to manufacturers' restrictions. Also, neither provides the array of services offered by PetSmart.
PetSmart has been able to effectively exploit these advantages. Over the past five years, the company's earnings-per-share growth beat both of these larger competitors.
Rx for Rex
Another dog-days stock that some investors might not be familiar with is MWI Veterinary Supply (Nasdaq: MWIV ) . MWI provides animal health products to more than 24,000 veterinary practices across the U.S. and nearly 1,500 practices in the U.K. Around 70% of its 2011 U.S. sales and 76% of its U.K. sales stemmed from pharmaceutical, vaccine, and parasitic products.
While independent veterinary practices account for most of its sales, MWI has had a long relationship with Banfield, the largest private veterinary practice in the U.S. Banfield operates around 800 veterinary hospitals located in PetSmart stores.
MWI grew earnings by 27.5% in its most recent quarter compared to the same quarter in the prior year. These earnings results were driven by strong revenue growth of 38.2% year on year. MWI's late-2011 acquisition of Micro Beef Technologies accounted for a significant portion of this revenue growth.
Several other distributors compete with MWI, but the company's biggest threat could come from its vendors. Pfizer (NYSE: PFE ) is MWI's top supplier. Its products accounted for 24% of MWI's sales in 2011. However, Pfizer also sells its products directly to veterinarians, so it is a competitor.
Large vendors like Pfizer present another type of challenge, also. Any decisions by these major vendors to significantly change distributor relationships could mean trouble for MWI.
MWI has flourished despite the competition. Shares are up 34% so far this year. However, the drought throughout much of the U.S. and higher commodity prices could impact MWI's production animal business in the near term.
Pound for pound
Which stock is the better play for investors? Pound for pound, I would have to go with PetSmart. The stock trades at a forward price-to-earnings multiple of 18, compared with a forward P/E multiple approaching 20 for MWI.
PetSmart's dividend yield currently stands at 1% with a low payout ratio of 20%, indicating that the company should be in good shape to keep the dividends flowing. MWI does not currently pay a dividend.
In terms of competitive advantages, PetSmart appears to be the stronger of the two. While MWI boasts several compelling strengths, PetSmart's dominance in the pet products and services niche appears to give it a reasonably strong moat.
Should investors go ahead and buy a stock for the dogs during these hot dog days of summer? The risks seem high with the European situation threatening to drag down markets yet again. But who knows? Maybe this threat will be all bark and no bite, even though the prudent approach seems to be keeping investing activity on a tight leash.
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