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3 Pet Economy Stocks With Fetching Futures

By Anne Burdakin - Mar 22, 2020 at 12:44PM

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Spot and Fluffy are living the good life -- invest so you can too.

A booming pet care industry is offering investors opportunity just when they need it.

Pet ownership is growing. A 2020 survey by the American Pet Products Association showed that 67% of U.S. households own a pet, which works out to 84.9 million homes. Back in 1988, the first year the survey was conducted, only 56% of U.S. households owned a pet. 

Attitudes toward pets have also changed over the decades. Now, pets are seen as family members, and owners increasingly want to be sure their pets enjoy the best nutrition, exercise, and healthcare. This is called the humanization of pets, and it is a lucrative market to be in. Let's take a look at three companies with promising futures in this industry.

Two dogs in sunglasses laying on their backs in the yard

Image source: Getty Images.

Zoetis

For more than 60 years, Zoetis (ZTS 1.35%) has been a leader in veterinary medicines, vaccines, and diagnostic tools. Even before being spun off by Pfizer in 2013, Zoetis was a leader in animal health.

Zoetis lays claim to a big chunk of consumer spending on pets. It generated $6.3 billion of revenue in 2019, up 7.5% year over year. Non-GAAP earnings per share increased 16%, clocking in at $3.64. 

The company is expanding as it recently acquiring ZNLabs, a veterinary lab services supplier, and Ethos Diagnostic Science, a veterinary diagnostics lab. These acquisitions, plus others, are aimed at expanding Zoetis' already sizable share of the lucrative diagnostics market.

Zoetis believes the global veterinary diagnostics market is worth more than $4 billion. It expects the diagnostics category to grow faster than the animal health category, driven by pet owners' interest in pet wellness and the increasing convenience of pet clinics capable of doing testing. 

So what can investors expect going forward? Zoetis management provided full-year 2020 revenue guidance of about $6.7 billion (at the midpoint of the range), which would mean an increase of 7% over 2019. Adjusted earnings of $3.95 per share would represent 9% growth. The company pays a $0.20 quarterly dividend, giving the stock a 0.8% yield. 

Zoetis is a strong company with established leadership in a growing industry. With the recent market turbulence, the stock price has come down to levels last seen in May 2019. This as an excellent opportunity for investors to get in while this promising business is on sale.

PetIQ

Idaho-based PetIQ (PETQ 5.48%) provides veterinary-grade pet health products and veterinary services through retail channels across the country. The company's branded medications are manufactured at its own facility in the U.S.

PetIQ provides veterinary services at 3,400 retail partner locations in 41 states through its VIP Petcare business. Partners include retailers like Walmart, Target, and Tractor Supply, and the company is also opening wellness clinics within some of these retailers' locations with 80 in operation at the end of 2019. By the end of 2020, the company plans to add at least 130 more locations, bringing the total to at least 229 nationwide.

"Our model of providing affordable and convenient access to veterinary products and services continues to gain momentum, demonstrated by 45% compounded sales growth and 65% compounded adjusted EBITDA growth since our IPO July 2017 through 2020," said CEO Cord Christensen in the company's latest earnings release. "In 2019, we were able to deliver another strong year with net sales growth of 34% and adjusted EBITDA growth of 49%."

Boosting PetIQ's results are the PetArmor, Sentry, and Sergeant's brands, brought on board in the $185 million acquisition of Perrigo Animal Health last summer. And in January, PetIQ acquired Capstar, a well-known producer of pet flea protection medications, for $95 million.

Assuming a full year of contribution from Capstar, PetIQ is guiding to revenue of $815 million in 2020, a 15% increase from 2019. Adjusted EBITDA of at least $100 million would be up an impressive 65% year over year.

The company has made smart product acquisitions that fit into existing distribution channels, and it's expanding the veterinary and wellness care segments in high-traffic partner locations. Its stock has been clobbered along with most of the market during the coronavirus scare, making the share price especially attractive.

Freshpet

Freshpet (FRPT 1.52%) was an early leader in the concept of fresh, refrigerated pet foods. The company was built on the idea that such offerings are much healthier for pets than dry or canned foods, just as the same is true for humans.

A sample of Freshpet dog food made from chicken

Image source: Freshpet

In the last five years, Freshpet's household penetration has grown from 1.8 million to 3.2 million households with dog food increasingly making up that growth. Once a customer has tried Freshpet, 70% make repeat purchases, and 82% report a visible health difference, according to a 2018 company survey.

Freshpet's growth demonstrates what a game-changer this niche market can be. Revenue grew 27% in fiscal 2019 to $246 million, and household penetration grew 25% in the same time frame. The company believes this is just the beginning of capturing its total addressable market, and management aims to increase household penetration from the current three million to eight million by 2025.

Widening brand exposure is fueling much of Freshpet's rapid growth. Customers see Freshpet in aisles at grocery stores and big-box chains, and are exposed to partner brand messaging through Walmart, Kroger, Whole Foods, and Petco.

Management's guidance for 2020 is pretty rosy. Net sales are projected to jump 26% to over $310 million, and adjusted EBITDA should leap 65% to $48 million this year.

Freshpet is making investments in its manufacturing, distribution, and marketing to keep up its growth. On March 2, the company issued four million shares, generating $252 million in proceeds to fund these efforts. 

The stock has fallen this month for two reasons: The company missed top- and bottom-line expectations for its fourth quarter, and it has also fallen victim to the broad market sell-off. Freshpet is in a high-growth phase, requiring considerable spending, but pet spending trends, proven customer loyalty, and strong retail distribution partners all point to a bright future.

More conservative investors may want to watch the story play out for a couple more quarters in this uncertain environment, but as the cononavirus pandemic punishes the market, all three of these pet-friendly stocks present unique buying opportunities.

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Stocks Mentioned

Zoetis Inc. Stock Quote
Zoetis Inc.
ZTS
$174.21 (1.35%) $2.32
Freshpet, Inc. Stock Quote
Freshpet, Inc.
FRPT
$52.68 (1.52%) $0.79
PetIQ, Inc. Stock Quote
PetIQ, Inc.
PETQ
$17.71 (5.48%) $0.92
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$122.63 (0.86%) $1.05
Target Corporation Stock Quote
Target Corporation
TGT
$142.38 (0.81%) $1.15
The Kroger Co. Stock Quote
The Kroger Co.
KR
$48.14 (1.71%) $0.81
Pfizer Inc. Stock Quote
Pfizer Inc.
PFE
$52.31 (-0.23%) $0.12
Whole Foods Market, Inc. Stock Quote
Whole Foods Market, Inc.
WFM
Tractor Supply Company Stock Quote
Tractor Supply Company
TSCO
$196.31 (1.27%) $2.46

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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