The Dog Days of Summer: Checking in with Pet Stocks
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Like most great analysts, I get the majority of my investment ideas from TikTok. Recently, while I was scrolling through the endless Dogecoin content and "Ice in my Veins'' memes, I came across a young woman painstakingly assembling an intricate meal for her pit bull. It included Wagyu beef steak, raw pumpkin, tripe, avocado, kiwi, a steamed tiger prawn, beef kidney, bone broth, and a single scoop of papaya. Jealousy quickly overcame me as I determined a rescue pit bull was eating better than me, but that was quickly replaced by the realization that young people are willing to spend a lot of money on their pets. With this realization came the motivation to explore the companion sector and check in with MyWallSt's own pet stocks: Trupanion and IDEXX Laboratories.
Before we start breaking down segments and companies, let's take a look at overall sector trends. Pet care spending is expected to increase to $275 billion by 2030, representing an annual growth rate of 8%. This can be attributed to two main factors: the increasing pet population and humanization. During the pandemic, the desire for pets in the United States hit an all-time. In January, the Washington Post reported that many shelters across the country were simply running out of pets. Last Chance Animal Rescue in Maryland saw a 40% increase in dog adoptions, and cat adoptions at Homeward Bound in Nevada more than doubled. But this frantic demand for furry friends is an acceleration of an already existing trend. While empty-nesters of older generations have been snapping up pets to increase their at-home family, the most significant growth can be seen in Millennials and Gen Z, where pet ownership has often taken the place of parenthood.
Importantly, these pets are joining homes where they are considered an essential part of the family and this has meant consumers are more health-conscious and willing to spend more. Trends show that, when compared to past generations, Millennial and Gen Z pet owners are more likely to purchase food and products from small, family-owned, or natural companies and are highly reliant upon veterinary services and guidance. This explains both why that pit bull on TikTok was receiving a tasting menu, and the recent explosion of all-natural, human-grade pet foods.
In an attempt to find a way to invest in this trend, I took a look at Freshpet (FRPT), which creates fresh, refrigerated meals for cats and dogs. The company has done exceptionally well these last few years, with revenue growing 25% year-over-year since 2016. Its status as a small company has helped it lure young consumers, forcing conglomerates like Smuckers and Nestlé to frantically buy up similar all-natural brands. However, I'm not the only person to take notice of the company as its stock has increased 142% in the last year. This has pushed its valuation to rather lofty heights, resulting in a price-to-sales ratio (P/S) of 23 — a bit too high for a dog food manufacturer. So, while Freshpet should continue to expand and ride the wave of pet wellness, it will need to grow into its valuation before it can be considered a buy.
Similar enthusiasm can be found for MyWallSt's pet stocks: Trupanion and IDEXX Labs. Both companies are part of the pet healthcare segment; Trupanion is pet insurance and IDEXX provides veterinarians with diagnostic equipment and consumables. In 2020, the companies' stocks rose more than 100% each but, more importantly, we can begin to see the real impact and potential of generational shifts.
For the first time, vet offices saw more wellness appointments than clinic visits as more owners are taking their pets in for an annual check-up and preventative screenings. This, combined with the increasing costs of animal healthcare, will help legitimize the appeal of pet insurance in the eyes of consumers. Less than 2% of the pets in the U.S. are insured, meaning the total addressable market is still huge. Trupanion controls the largest share of the pet insurance market and, with its recent partnership with Aflac, it has the potential to become a staple of employee benefits and expand for years to come.
Additionally, an increase in vet visits and health screenings is great for IDEXX, which provides in-clinic wellness panels. The company benefits from every test, not just the initial sale of equipment, creating a nice stream of recurring revenue. Over the course of 2020, the company has seen same-store revenue increase by 12% year-over-year and its gross margins expand from 20% to 25.7%.
Trupanion and IDEXX are an essential part of the humanization of pets. Most important of all, they're part of pet healthcare which is expected to grow 8.8% annually for the next five years, outpacing all other pet segments — food is only expected to grow 4.8%.
In light of these positive signs, we have updated our comments on IDEXX (IDXX) and Trupanion. To start with Trupanion, click on the stock button below.