The petcare industry is expanding rapidly today. On the back of rising pet ownership levels and the ‘humanisation’ of our animal friends, the industry is growing at about 6% per year.
For investors, this industry growth is creating some lucrative opportunities. With that in mind, here’s a look at some of my top stock picks in the petcare sector for 2021 and beyond.
UK pet care stocks
Here in the UK, there are a number of petcare stocks listed on the London Stock Exchange. Two names that come to mind are Pets At Home, which is a pet-focused retailer, and CVS Health, which operates vet clinics across the UK.
Both of these companies are growing at a healthy rate right now. However, they don’t strike me as ‘strong buys’. Every time I visit a Pets At Home store, I walk away unimpressed with the offering.
Meanwhile, CVS generates a low return on capital (5.1% last year) and has quite a bit of debt on its balance sheet. All things considered, I think there are better ways to play the petcare boom.
Terry Smith owns this stock
One stock I do like in the space is IDEXX Laboratories (NASDAQ: IDEXX), which is listed in the US. It’s the leading global manufacturer of diagnostic tests for the vet market. IDEXX operates a ‘razor-and-blade’ model with an installed base of about 60,000 systems in vet clinics and reference labs. These systems generate steady recurring revenues because customers are required to continually buy test consumables.
IDEXX is a really impressive company, in my view. Not only does it have a great revenue growth track record (five-year growth of 69%) but it’s also very profitable. Over those last five years, return on capital has averaged 26%, which is excellent. I’m not the only one who’s impressed by this company. Terry Smith (aka ‘Britain’s Warren Buffett’) also likes the stock – currently it’s the third largest position in his Fundsmith fund.
One downside to this stock is that it’s very expensive. Currently, its forward-looking P/E ratio is about 65. This means it’s priced for perfection. I’m comfortable with the risks however, given IDEXX’s dominant position in the industry and high level of profitability.
The Amazon of pet care?
Another petcare stock I’d buy today is Chewy (NYSE: CHWY). This petcare-focused online retailer also operates in the US. Through its website, consumers can purchase pet food and treats, pet supplies, and pet medications.
I see e-commerce and petcare as a great match. Online shopping gives pet owners exactly what they want. Convenience, a wide range of products (food, treats, toys, furniture, etc), product information, and pricing comparisons.
Chewy is growing at a fast pace. For the year ended 31 January, sales rose 47% to $7.1bn. Looking ahead, I expect the company to keep growing rapidly as consumers realise how convenient online shopping for petcare products is. This year, analysts expect the company to generate sales of $8.95bn – growth of around 26%.
One risk to be aware of here is that the company isn’t yet profitable. So, the stock could be volatile in the short term. Competition from rivals such as Amazon is another risk to consider. Overall though, I think this petcare stock has a lot of potential in today’s digital world.
