Stocks to buy

3 Pet Care Stocks to Capitalize on the Animal Economy

Most recent data shows that 66% of U.S. households own a pet. Another interesting point is that “85% of dog owners and 76% of cat owners consider their pets to be a member of the family.” A key conclusion from this statistic is that households are investing equally in food and healthcare for their pets. It’s therefore not surprising that pet care stocks have been value creators.

Another important point to note is that the above data is just for one country. If we look at global data, the market size will be significant. To put things into perspective, the global pet care market is likely to be worth $246.66 billion this year. It’s further expected that the market size will swell to $368.88 billion by 2030.

Therefore, companies in the industry will continue to flourish. Further, it’s still 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) is among the best pet care stocks to buy and hold. ZTS stock has trended higher by 21% in the last 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 robust in 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, which was higher by 7% on a year-on-year basis. Further, the Company reported 14% growth in earnings per share. Besides the headline numbers, I like the following points.

First, Zoetis has guided for adjusted research and development expense of $600 to $610 million for 2023. Strong focus on R&D is likely to boost growth through the launch of new products.

Further, Zoetis derived $1.18 billion in revenue from U.S. markets for Q3 2023. Revenue from the international segment was $956 million. With strong presence in almost all developed and emerging markets, Zoetis is positioned for sustained growth. The pet economy in emerging markets is gaining traction and Zoetis will benefit.

Chewy (CHWY)

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Chewy (NYSE:CHWY) is an e-commerce marketplace for pet food, supplies, medication, among others. CHWY stock performance has been unimpressive with a downside of almost 50% in the last 12 months. However, the stock looks undervalued and was recently assigned an “Overweight” rating by Morgan Stanley. I would not be surprised if the stock bounces back strongly in the coming quarters.

For Q2 2023, Chewy reported revenue growth of 14.3% on a year-on-year basis to $2.78 billion. While the number of active customers were stagnant, the Company reported 14.7% year-on-year growth in net sales per active customer.

I believe that there are two factors that will support EBITDA margin expansion in the coming years. First, sustained growth in net sales per active customer. Further, operating efficiency as the Company automates more facilities.

Margin expansion is an important point as Chewy reported free cash flow of $101 million for Q2. I expect annualized FCF more than $500 million in the next 12 to 18 months. This will provide flexibility for investments and increased shareholder rewards.

Freshpet (FRPT)

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Freshpet (NASDAQ:FRPT) stock has been largely sideways in the last 12 months. A breakout on the upside seems imminent for FRPT stock backed by strong results. Freshpet is a provider of fresh meals for dogs and cats in the United States, Canada, and Europe. This includes fresh meats, vegetables and fruits that are farmed locally.

In terms of positive triggers, Freshpet reported revenue growth of 32.6% on a year-on-year basis for Q3 at $200.6 million. Adjusted EBITDA for the same period increased to $23.2 million as compared to $3.5 million in Q3 2022.

Therefore, margin expansion was stellar and was driven by decline in input and logistics cost. The Company has guided for sustained improvement in margin through 2027. As cash flows improve, Freshpet will be positioned to make growth investments. It’s worth noting 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.

On the date of publication, Faisal Humayun did 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 writer, subject to the Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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