3 Pet Stocks for Animal Lovers

The pet care industry is flourishing as more people adopt furry companions as part of their post-pandemic lifestyle. Moreover, pet owners are now pampering their pets ever more generously, which has spelt rich rewards for pet care companies, according to Debbie Wang, senior analyst at Morningstar.

According to an American Pet Products Association (APPA) report, about 70% of U.S. households own pets. The report claims that the national pet industry clocked US$123.6 billion in sales in 2021, the highest level in history. A similar uptrend can be seen in the global pet care industry, expected to grow from US$232 billion in 2020 to US$350 billion in 2027.

As pet ownership accelerates among millennials and spending rises due to pet humanization and premiumization, the following pet stocks stand to benefit. These secular trends afford these businesses resilience even during times of economic uncertainty.

The largest e-commerce pet care retailer in the U.S., Chewy (CHWY) generated US$8.9 billion in 2021 sales across pet food, treats, hard goods, and pharmacy categories. The company’s product portfolio includes pet food, treats, treatments, medical prescription fulfillment, and hard goods, like crates, leashes, and bowls.

Brand loyalty, sticky purchase habits, pet humanization, and minimal cyclicality render the pet care industry quite attractive. “While a slew of players jockey for upstream (manufacturing) and downstream (retail) market share, Chewy's service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales,” says a Morningstar equity report.

By building out an army of dedicated customer service representatives whose principal qualification was their love of pets, the firm amassed a loyal customer base, with robust autoship (automatic ordering program) penetration and strong monetization.

“The firm's 73% autoship penetration, a subscription-based model that pet consumables and medication lend themselves to nicely, defrays fulfillment cost pressures relative to large peers,” says Morningstar equity analyst, Sean Dunlop, who recently lowered the stock’s fair value to US$43.50 from US$47.50, prompted by demand normalization and pressure in discretionary categories like hard goods and inflationary pressure in non-discretionary spending.

Yet, Chewy has been well-positioned to benefit from explosive e-commerce growth in the pet healthcare category, where the firm is posed to gain a high-40% online market share.

“With the expansion of higher-margin private label products, pet healthcare, and increasingly valuable maturing cohorts, Chewy looks poised to continue its leadership well into the future,” asserts Dunlop.

Leading animal healthcare firm, Idexx Laboratories (IDXX) develops, manufactures, and sells products, equipment, and services for pets and livestock. Its key products include single-use canine and feline test kits that veterinarians use to detect and manage livestock diseases. The firm also offers vet practice management software and consulting services to animal hospitals. The international market accounts for 38% of the firm’s total revenue.

Idexx has consistently expanded its scale and reach in the veterinary diagnostic lab business to build a narrow moat. The company is well-positioned to benefit from two key trends identified by a Morningstar equity report.

“First, pet ownership continues to grow, with an estimated 70% of U.S. households owning pets in 2021 compared with 56% in 1988,” the report says.

Second, pet owners are increasingly willing to spend more on their animals, “having more than tripled spending on pet products and services since 1994,” says Morningstar equity analyst Debbie S. Wang, adding that Idexx is uniquely able to cross-sell many products and services.

Further, Idexx has gained the scale that allows it to make acquisitions of any new competitors that might emerge as a serious threat. 

Additionally, the company has managed to expand its product portfolio despite widespread Covid-19 disruption. “In the normal course of business, Idexx consistently rolls out new products to receptive companion animal practices,” says Wang, pointing out that “the pandemic has not much affected this.”

She recently boosted the stock’s fair value to US$326 from US$301, primarily to reflect a readjustment to U.S. tax rates. 

Zoetis (ZTS) sells anti-infectives, vaccines, parasiticides, diagnostics, and other health products for animals. The firm earns slightly less than half of its total revenue from production animals (cattle, pigs, and poultry), and more than half from companion animal (dogs, horses, cats) products. Its U.S. business is heavily skewed toward companion animals, while its international business leans slightly towards production animals.

“Zoetis is the undisputed leader in the global animal health industry, and it possesses the widest moat of all the competitors,” says a Morningstar equity report.

The firm sets itself apart based on its impressive innovation across its product portfolio, including several drugs for specific pet ailments such as separation anxiety, the report adds.

Zoetis has also “expanded its presence into virtually every type of animal-related health market, including aquaculture and pet diagnostics,” says Wong, who recently trimmed the stock’s fair value to US$170 from US$186, to reflect ongoing unfavourable foreign exchange, drag from materials shortages, and the delay in regulatory approval of Librela, a drug to treat arthritis in dogs.

Wang categorizes these as near-term constraints that do little to alter the firm’s wide economic moat, including its intangible assets and cost structure.

“We expect these factors should be offset by continued strong growth in the companion animal business, adoption of new pet products, and ongoing penetration of international markets with pet therapies,” she contends.

Wang forecasts stronger long-term growth underpinned by Zoetis' larger presence in companion animal diagnostics and improved profitability supported by new products.