Expansion in the global pet car market will benefit these attractively valued companies
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The latest data shows that 66% of US households own a pet. Another interesting point is that “85% of dog owners and 76% of cat owners consider their pets a member of the family.” The main conclusion from this statistic is that households invest equally in food and health care for their pets. Therefore, it’s no surprise that pet care stocks have become value creators.
Another important point to note is that the data above is for one country only. If we look at the global data, the size of the market becomes significant. To put things into perspective, the global pet care market is likely to be worth $246.66 billion this year. It is further expected that the market size will grow to $368.88 billion by 2030.
Therefore, companies in the industry will continue to develop. Plus, it’s a good time to consider exposure to some of the best pet care stocks. This column discusses three stocks from the industry that are likely to be value creators.
Zoetis (ZTS)
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Zoetis (NYSE:ZTS) are among the best pet care stocks to buy and hold. ZTS stock is up 21% over the past 12 months. However, the stock trades at an attractive valuation and provides a dividend yield of 0.85%. I believe that dividend growth is likely to be stable over the next five years.
As an overview, Zoetis is a provider of animal health medicines, vaccines and diagnostic products. For Q3 2023, Zoetis reported revenue of $2.2 billion, up 7% on a year-over-year basis. Further, the Company reported 14% growth in earnings per share. Aside from the headline numbers, I like the following points.
First, Zoetis guided for adjusted research and development expenses of $600 to $610 million for 2023. A strong focus on R&D is likely to boost growth through new product launches.
Additionally, Zoetis earned $1.18 billion in revenue from US markets for Q3 2023. Revenue from the international segment was $956 million. With a strong presence in almost all developed and emerging markets, Zoetis is positioned for continued growth. The pet economy in emerging markets is gaining traction and Zoetis will benefit.
Chewy (CHWY)
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Chewy (NYSE:BLOW UP) is an e-commerce marketplace for pet food, supplies, medicine, among others. CHWY stock performance has been incredible with a downside of nearly 50% over the past 12 months. However, the stock appears to be undervalued and was recently assigned an “Overweight” rating by Morgan Stanley. I wouldn’t be surprised if the stock surged strongly in the coming quarters.
For Q2 2023, Chewy reported revenue growth of 14.3% on a year-over-year basis to $2.78 billion. While the number of active customers was stagnant, the Company reported 14.7% year-over-year growth in net sales per active customer.
I believe there are two factors that will support EBITDA margin expansion in the coming years. First, continued growth in net sales per active customer. Plus, operational efficiency as the Company automates more facilities.
Margin expansion is a key point as Chewy reported free cash flow of $101 million for Q2. I expect annual FCF in excess of $500 million over the next 12 to 18 months. This will provide flexibility for investments and increase shareholder rewards.
Freshpet (FRPT)
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Freshpet (NASDAQ:FRPT) the stock has been mostly sideways over the past 12 months. A breakout to the upside seems imminent for FRPT stock supported by strong results. Freshpet is a provider of fresh foods for dogs and cats in the United States, Canada, and Europe. This includes locally grown fresh meats, vegetables and fruits.
In terms of positive triggers, Freshpet reported revenue growth of 32.6% on a year-over-year basis for Q3 to $200.6 million. Adjusted EBITDA for the same period increased to $23.2 million compared to $3.5 million in Q3 2022.
Therefore, the margin expansion was very good and was driven by the decrease in the cost of input and logistics. The Company has guided for continued margin improvement through 2027. As cash flows improve, Freshpet will be positioned to make growth investments. It is noteworthy that as of Q3 2023, the Company had a cash buffer of $338 million. This will support investment activities and Freshpet is targeting capital expenditure of $240 million for 2023.
As of the date of publication, Faisal Humayun does not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writers, subject to InvestorPlace.com Publishing Guidelines.
