Pet Portfolio: 9 Stocks For Animal Lovers

NEW YORK (TheStreet) -- It's said that a dog is a man's best friend, but he could also be your best investment.

Pet stocks -- those companies that cater to the health and happiness of your furry companion -- is arguably the hottest growth market going.

Indeed, amid the greatest consumer downturn of this generation, the pet industry managed to grow 5.4% in 2009 to $45.5 billion, according to the American Pet Products Association (APPA).

"Pet suppliers offer more compelling growth prospects than most retail categories," Morningstar analyst R.J. Hottovy, wrote in a note. And it doesn't seem like this momentum will slow any time soon, with APPA predicting another 5% jump in 2010.

According to the APPA, 63% of U.S. households own pets, and it's a number that's poised to expand, as the trend of humanizing pets has also boosted the sector. Service-based businesses like dog walkers, pooper-scoopers, trainers and even massage-therapists are booming, while day care, pet walking and pet sitting all continue to be in high demand.

Within the sector, the more reliable pet plays are those companies that provide veterinary and animal-health products; while consumers might delay purchasing a new chew-bone for their pup, or might stock up on a cheaper brands of biscuits, they won't deny medical care to their beloved pet.

In 2009 health-care spending on pets surged 8.5%, as medical advances generated a greater range of services available. "From CAT scans, root canals and cancer surgery, to antibiotics, anti-depressants and even grief counseling, pet owners have more medical choices and spending options than ever before," the APPA said. The association expects this sector to increase 6% in 2010.

Still, with such a litter of pet-centric companies to choose from -- and still others with smaller animal divisions -- how can the investor sort through them all? Read on....

PetSmart

With some 1,150 retail stores and 160 PetsHotels, PetSmart ( PETM) has achieved an almost ubiquitous array of products and services for pets, including toys, food, grooming, on-call veterinarians and day care.

In the fourth-quarter, PetSmart profit dipped 4% to $65 million, or 61 cents a share, compared with $78.4 million, or 62 cents, in the year-ago period, weighed down by higher costs. Still, holiday sales were strong, reaching $1.41 billion, a 3% increase from $1.36 in 2008. Same-store sales, a key measure of a retailers performance, grew 1.5% during the quarter.

Looking ahead, PetSmart says it expects first-quarter earnings in the range of 40 cents to 44 cents a share, and full-year profit between $1.73 and $1.83 a share, significantly better than Wall Street's forecast.

Shares of PetSmart hit a 52-week high this week of $31.72, but dropped down a bit, closing on Wednesday at $31.51. While the stock reached several 12-month highs over the past weeks, Jim Cramer said during his March 12 Mad Money segment that sales are rising enough, and PetSmart's multiple is low enough, to justify buying the stock at current levels.

Several analysts also upped their price target on the stock following its fourth-quarter earnings release. Goldman Sachs lifted its price target to $32 from $30, Janney raised it to $30 from $28 and Wedbush Morgan upped its to $35 from $32.

Currently, PetSmart has a 13% share of the $43 billion U.S. pet supply market and Hottovy expects it will pick up more gains. It will also benefit from the growing $4 billion pet service sector. PetSmart currently has a 12% stake in this segment, and additional grooming, boarding and training offerings will most likely drive this figure upward, Hottovy wrote in a note.

The biggest fear for PetSmart investors is that big-box retailers like Wal-Mart ( WMT), Target ( TGT) and Costco ( COST) will swoop in and steal market share away from pet retailers. But while discounters have the scale to increase market share, it is doubtful they will provide the same breadth of products and animal-centric customer service that a brand like PetSmart provides.

PetSmart, may however, be forced to match discounter prices and sacrifice profitability, Hottovy wrote.

PetMed Express

PetMed Express ( PETS) is the Amazon ( AMZN) of the pet world, selling medicine for animals at a discount directly to consumers through its 1-800-PetMed site.

But while PetMed has seen profits increase over 11 consecutive quarters, its stock hasn't been as steady. Investors tend to gravitate to PetMed stock as a defensive play and then move on to riskier investments when the market recovers.

PetMed reached a 52-week high on Tuesday of $23.46. But back in October the stock had a massive fall off. Over the 52-week period PetMed has traded as low as $14.05.

Market share for all online pet pharmacies is expected to increase between 11% and 20% in the next few years, and since PetMed is the largest in the group, it is poised to realize the greatest benefit, Cramer said.

In its third quarter, PetMed profit rose 14% to $5.6 million, or 25 cents a share.

VCA Antech

VCA Antech ( WOOF), which runs about 500 veterinary hospitals and diagnostic labs around the country, is a strong bet for when the economy fully recovers.

The crown jewel at VCA is the diagnostic lab business, Wang wrote, one of the fastest-growing segments of animal health. VCA is a dominant player in this universe. "The company has lab services down to a science. An impressively large transportation fleet provides twice-a-day pickup service in metropolitan areas, and most hospitals can receive same-day results."

And these lab tests are generally very profitable, with operating margins exceeding 40%.

In 2009, the company earned $131.4 million, or $1.53 a share, down from $133 million, or $1.55, in the year prior. Revenue rose 3% to $1.31billion from $1.28 billion.

Looking ahead VCA expects to earn $1.60 to $1.68 a share on revenue of $1.39 billion to $1.42 billion. But it cautioned that the economy makes it tough to predict when, exactly, the business will recover.

Idexx Laboratories

Idexx Laboratories ( IDXX)may not be the overwhelming market leader in every pet-product line, but it is establishing itself in a few key areas.

The company produces diagnostic test kits, lab equipment and instruments for vets and livestock, and also has water-testing and food-production animal-health lines.

In doing so, Idexx has carved out a dominant position with its single-use test kits for office use, which are higher-margin items, Morningstar analyst Debbie Wang wrote in a note. It is also the No. 2 in off-site lab testing, an area that has recently seen double-digit growth.

In Idexx's fourth quarter, its profit jumped 31% to $31 million, or 53 cents a share, from $23.6 million, or 40 cents, in the year prior. Revenue shot up 11% to $270.3 million.

Highlights from Idexx's most recent earnings report include: full-year growth in the companion animal business, which inched up 1.1%; Wang had been forecasting a slight decline in the segment in 2009. Reference lab volumes also played a role in driving revenue, another indication that the companion animal market may have stabilized.

From this report, it appears as if the revenue decline that hit Idexx in the fourth-quarter of 2008 has bottomed out, Wang wrote. Still, she doesn't expect business to come roaring back to life, predicting a moderate single-digit top-line growth.

Shares of Idexx have traded between $31.57 and $59.95 during the latest 52-week period, and are currently changing hands at $56.78.

Central Garden & Pet

Central Garden & Pets ( CENTA) is a riskier play, as its business is divided in half between pet and garden products, the latter of which is currently struggling.

In its first quarter, the company, which sells pet toys, dog and cat food, leashes and grooming supplies, as well as other accessories, narrowed its loss to $2.9 million, or 4 cents a share, from a loss of $6.2 million, or 9 cents, in the year-ago period.

Central Garden & Pets sales fell 8% to $269.2 million from $292.5 million. While its pet product unit slipped just 2% to $182 million, sales at its gardening division plunged 18% to $88 million.

Last month Central Garden & Pet priced an offering of $400 million, bigger than the $300 million it previously predicted, in senior notes due in 2018. The proceeds will be used to buy back senior notes that come due in 2013, giving Central Garden & Pet more financial flexibility.

Shares of Central Garden & Pet traded between $6.94 and $12.45 over the past 12 months and is currently changing hands at $10.27.

MWI Veterinary Supply

MWI Veterinary Supply ( MWI) distributes pharmaceuticals, vaccines, diagnostics, capital equipment, supplies, veterinary pet food and nutritional products to veterinarians.

During its first quarter, MWI Veterinary Supply earned $7.8 million, or 63 cents a share, a 32% rise from $5.9 million, or 48 cents, in the year-ago period.

Revenue increased 2% to $236.1 million, with strength from companion-animal products. This offset declines from a change in a livestock contract with one of MWI's largest vendors, as well as unfavorable economic conditions for livestock producers. Internet sales for MWI to independent veterinary practices and producers also soared 34%.

In February, the company acquired U.K.-based Centaur Services, which supplies animal health products to vets, for about $47 million. This gives MWI the opportunity to move into the international market and expand its role in the animal-health industry.

Shares of MWI are currently trading at $43.23, flirting with its 52-week high of $43.50.

Animal Health International

Animal Health International ( AHII) supplies more than 40,000 products, including pet food, drugs and equipment, to veterinarians, retailers and farmers.

While the bulk of Animal Health's sales are from products for farm animals, not for Fido, it still derives some 40% of its sales from pet-related merchandise.

In its second-quarter, Animal Health's profit was nearly cut in half, tumbling to $1.2 million, or 5 cents a share, compared with $2.3 million, or 9 cents, in the prior year.

Sales sank 7.5% to $170.5 million from $184.5 million. Animal Health says that although it is seeing growth in its veterinary business, commodity prices hurt the production side. It is also dealing with a disappointing beef market, due to the uncertainty of grain prices.

Looking ahead, Animal Health expects full-year earnings in the range of 9 cents to 22 cents a share, below Wall Street's forecast of 32 cents.

Still other companies, while not necessarily pure plays on the pet market, remain worthy of attention.

One notable example: Earlier this month Merck ( MRK) and Sanofi-Aventis ( SNY) merged their animal health businesses, becoming the biggest player in the veterinary industry.

The new unit will make up about 29% of the market, surpassing Pfizer's ( PFE) Fort Dodge unit, which holds 20%.

Sanofi's Merial animal health business makes Frontline flea and tick fighter, as well as Heartgard, which prevents heartworms. Merck's Intervet/Schering Plough division produces drugs and vaccines for farm animals. In 2009, Merial recorded sales of $2.55 billion and Intervet raked in $2.74 billion.

Then there are companies like Abaxis ( ABAX), which makes portable blood analysis systems for humans and pets, and Henry Schein ( HSIC), which is primarily a dental products business, but also distributed animal health products. Patterson ( PDCO) also has a companion-pet division, but this segment only makes up 18% of its total sales. All have the potential to benefit from the pet market, and fill out the stable of your pet portfolio.

-- Reported by Jeanine Poggi in New York.

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