Small, continual changes often go unnoticed until they are too big to ignore. One such consequential shift in America has been the concept of the nuclear family, notably as it relates to parenthood. In 1950, the U.S. birth rate was approximately 24 children per 1,000 people, versus 12 children per 1,000 people in 2020.
But what hasn't changed is fundamental human nature. At our core, we're social beings with the need to connect, develop bonds, and provide care. If you've been scrolling through your social media feeds in recent years, you've likely noticed our pets are quickly filling in as members of the family.
Spending on our "fur babies" is a nearly $100 billion industry, according to the American Pet Products Association, growing approximately 6% year over year in 2019. Growth this year could be even stronger due to the tremendous demand for pets during the pandemic. Three stocks to cash in on this trend are Chewy (NYSE:CHWY), Freshpet (NASDAQ:FRPT), and Elanco Animal Health (NYSE:ELAN).
Chewy's growth is purrfect
It's notably difficult to become a large-scale e-commerce retailer in today's environment. You must compete with the giant in the space, Amazon, but you also must go up against other retailers and new entrants in a field with very few barriers to entry. Additionally, you must be able to keep prices down, because bargain shopping is effortless online.
Still, there's room for savvy operators that cater to a dedicated niche. And that's just what Chewy has been able to do. Through the first three quarters of 2020, the company reported revenue of $5.1 billion, a 46% increase over the prior-year period. Investors have responded accordingly, and the share price has increased by 300% over its 2019 IPO price.
But it's not too late to buy this stock, since there are significant future catalysts. Chewy is thinking deeper than simply food and chew toys. It is aggressively expanding into pet healthcare, which will not only make the company more profitable, but also make the user experience stickier.
Freshpet aims to make pets healthier
The trend of treating pets as family has one significant downside: Many pets are starting to exhibit some of the lifestyle afflictions that affect their owners, including obesity and diabetes. In 2016, Banfield Pet Hospital reported canine diabetes increased nearly 80% in the previous decade. Freshpet aims to reverse these figures by ensuring pets have healthy, fresh, and natural food.
Pet owners might not even know the trade-off they're currently making with their pets' food. In exchange for longer shelf life, many pet-food companies use lower-quality shelf-stable ingredients or high levels of preservatives. Freshpet says it only uses all-natural preservative-free food. This initially presented a huge risk to scalability, as its food required refrigeration. But the company is increasingly winning shelf space as owners understand the importance of fresh and healthy nutrition.
The company continues to exhibit strong growth, with a 30% top-line increase through the first three quarters over the prior-year period. This was an acceleration from the 27% growth in that year-ago period. Look for growth to accelerate as more owners tie better nutrition to a higher quality of life for their pets, and the stock price should keep rising once Wall Street becomes more familiar with this under-the-radar company.
Elanco Animal Health is one to watch long term
Admittedly, Elanco Animal Health has been a disappointing stock, considering the broader trend in pet-based consumer spending. Born from a spinoff from Eli Lilly in 2018, its shares are only 25% higher than the IPO price, as the company reported full-year revenue growth of less than 1% from the prior year in 2019. Still, there are reasons to be hopeful the company can turn things around.
Lost in its results is the fact the company produced revenue growth of 23% year-over-year in its companion animal (read: pets) therapeutics division. It's clear management is taking notice of these trends. In August, Elanco finalized the acquisition of Bayer's Animal Health business, which, in addition to providing scale, takes advantage of Bayer's direct-to-consumer pet health business.
That transaction pushes the pet business to approximately half of total revenue, versus the farm-animal-heavy portfolio Elanco held before the acquisition. Needless to say, the economics of being a cost input for cattle and pork ranchers trying to squeeze ever nickel they can from their livestock versus a pet owner willing to pay whatever it takes to make their pet healthy is radically different. Post-merger execution is always a risk, but the long-term trends of increased spending on pet health remains a positive tailwind for the company.