The pet care industry has gone through a massive boom during the pandemic where it seems everyone needs to have a companion pet. This lit a fire under the pet care stocks.
Unfortunately for the animals themselves, adults have grown weary of the idea of pet ownership or are unable to afford the ongoing costs, and this has led to euthanasia rates across United States shelters of animals that reach the maximum of three years.
However, the pet industry was strong before the pandemic, and it will be strong after, as irresponsible owners are replaced by true animal lovers who understand the responsibilities involved in ownership. own a pet.
Food, vet visits, play toys, etc., will continue for most of the 85 million families that own some kind of pet in the US These owners spend an estimated $99 billion annually for to their pets. I have no doubt that it will continue to grow.
Here are three pet care stocks that will benefit from this consistent growth.
Colgate-Palmolive (CL)
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I would have come with you Nestle (OTCMKTS:NSRGY) because it owns the Purina brands, which include Pro Plan, Friskies, Fancy Feast, and Dog Chow, as well as a minority stake in IVC Evidensia, an owner of more than 1,500 vet clinics in Europe. However, then I remembered that all my cats eat Hill’s Science Diet oral care kibble, which Colgate-Palmolive (NYSE:CL) has owned since 1976.
As a stock, Colgate has underperformed over the past five years, gaining 30%, which is lower than the 84% return of S&P 500. Time for a return to the mean to begin and send CL stock higher in 2024.
What prevents it? It has performed very well since hitting a 52-week low of $67.62 in mid-October. That was partly due to its stock being upgraded at the time by Stifel Nicolaus analyst Mark Astrachan, who moved it from “Hold” to “Buy” with an $81 price target.
It has already hit analysts’ 12-month target in less than three months. If its momentum continues into 2024, $100 or more is certainly on the cards.
Through the nine months ended September. 30, 2023, Colgate’s Pet Nutrition segment had revenue of $3.18 billion, 20% higher than a year earlier. It accounts for 22% of the company’s total revenue and 17% of its operating income.
In September 2022, it paid $719 million for Red Collar Pet Foods, which operates three dry pet food manufacturing plants in the US. This is part of its plan to grow Hill’s business. That should help the pet care segment contribute more to Colgate’s business.
Pet Valu Holdings (PTVLF)
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I’m not a fan of Chewy (NYSE:BLOW UP) because even though it’s an online pet care dynamo, it doesn’t know how to run its business profitably. Our local PetSmart is incredibly well run so I wish the company was publicly traded. Oh, it’s not like that.
So, I went to the Canada option and Pet Valu Holdings (OTCMKTS:PTVLF), the Toronto-based operator of 225 company-owned and 541 franchised stores across Canada.
In the first nine months of 2023, it opened 22 new stores and renovated, expanded or relocated another 29. That’s a bit shy of its goal of 35-40 for 2023. It opened 18 net- new store in 2020, 28 in 2021, and 45 in 2022. There was also the acquisition of 66 franchised stores operating under the Chico banner in Quebec.
The company’s growth plan is based on three ideas.
The first is to increase the number of stores from 766 today to more than 1,200 in the future. The second is to continue to drive same-store sales growth. In the most recent quarter, it was up 4% year-over-year. Finally, by modernizing its systems, the plan is to improve the company’s operating margin. It still has work to do. In Q3 2023, its operating margin was 14.3%, 340 basis points lower than a year ago. Lower gross margins did not help the situation.
Based on its full-year earnings per share guidance of at least $1.60, it trades at a reasonable 18 times earnings. Down 27% over the past year, now is a great time to buy at Pet Valu.
Idexx Laboratories (IDXX)
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As its investor relations website states, “Idexx Laboratories (NASDAQ:IDXX) is a global leader in veterinary diagnostics, software, and water microbiology testing.”
The company has three operating segments: Companion Animal Group (92% of revenue), Water Quality Products (5%), and Livestock, Poultry and Dairy (3%). Not only does the animal companion business generate most of its revenue, but it also takes in most of Idexx’s operating profits.
Of the accompanying livestock revenues in Q3 2023 ($837.2 million), 88% are recurring, which is optimal because it leads to higher operating margins. By 2023, it expects to grow its operating margin by 370 basis points over its mid-point guidance to 29.7%.
All of this should lead to earnings per share of $9.82, which is 56 times earnings. However, despite the nosebleed valuation, it was higher in June 2021 when IDXX traded above $700. Back then, investors paid upwards of 76 times earnings to own its shares.
Best of all, the Idexx balance is clean. At the end of September, its net debt was $809 million [total debt of $1.14 billion less cash of $332 million] or less than 2% of its $46 billion market cap.
In 2024, if interest rates don’t drop, Idexx won’t care. It has almost no leverage. That’s my kind of company.
On the date of publication, Will Ashworth does not have (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.
