'Best Of Breed' Stocks

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

How we love our animals! I bet many viewers tuned out the State of the Union Address to watch the Westminister Dog Show. The Puppy Bowl had a strong showing even against the Super Bowl. Some spoil these pets with outrageous presents such as Louis Vuitton carriers, fragrance for dogs at $3,000 a bottle, and $3 million dog collars. Even those of us who would blanch at these gifts still want to pamper our pets and care for their health.

Several stocks have been beneficiaries of our puppy love, including recent IPO Zoetis (NYSE: ZTS), PetSmart (NASDAQ: PETM), which has tripled since 2010, Tractor Supply Co. (NASDAQ: TSCO), PetMed Express (NASDAQ: PETS) and MWI Veterinary Supply (NASDAQ: MWIV). If there isn't a pet ETF there should be as PetSmart and Tractor Supply even showed strength during the 2008-9 stock downturn.

Best of Breed

You may be confused by the inclusion of Tractor Supply on that list, but it is one of those names that doggedly (pun intended) climbs higher almost every day. The "gentleman farmer" retailer supplies farming and ranching supplies and a huge part of their business is pet and livestock care.

Since 2009 Tractor Supply has quintupled and is pennies away from an all-time high. The P/E is getting extended, however, at 27.07 and the yield at .80% is getting flattened. But there's a reason for that -- the company reported Q4 earnings on Jan. 30 that surprised with a 16% increase in earnings and gross margin growth of 33% that caused the stock to surge 10%.

New CEO Greg Sandfort specifically mentioned the pet food and animal feed segments at the top of the call as important drivers that are steady performers and a new horse feed exclusive to Tractor Supply that is number one brand positioned. CFO Tony Crudele also noted the strength of pet and animal products on the call.

This very dependable company has been buying back its own shares to the tune of 1.21 million shares and buying more in 2013. Tractor Supply ended up with $147 million in cash for 2012. The company is opening 100-105 stores in 2013 for a yearly increase in square footage of 8%. What's not to like about this working dog?

Leaving The Nest

Zoetis, formerly the Animal Health Unit of Pfizer, debuted as a stand alone on Feb. 4 to much fanfare as the biggest IPO since Facebook. As the biggest animal health company, Zoetis added revenues of $4.3 billion to Pfizer’s coffers in 2012 alone and has moved up over 10% in its first 10 days of trading. Pfizer is still keeping 83% of its shares of Zoetis, but may sell in August.

Going forward things look bright for Zoetis as agricultural demand continues for livestock products that accelerate growth, such as antibiotics and products that reduce the need for water for livestock. With their drug development infrastructure in place and much fewer trials needed than for drugs for humans, Zoetis' way looks clear at least through the seven-year partnership it has with Pfizer for chemicals needed to develop new animal drugs.

Zoetis has several big pharma competitors in the space -- Merck, Sanofi, and Eli Lilly -- but with an ever-expanding pie, competition is moot. As Fool Sean Williams pointed out, sales are increasing at all four annually. Zoetis is trading at a 36.87 P/E so it's pricey here and some investors may prefer to buy into parent Pfizer with its 3.0% yield until they unload the rest of their Zoetis stake.

The Runts of the Litter

Despite its dividend of 4.6%, no debt, and 15.99 P/E, the pet drug and supply online delivery company PetMed Express may be the weakest of all these. It disappointed on top line but beat on the bottom line at its last earnings release in January. It has $2.35 cash per share, only 207 employees, but is fairly thinly traded and has a high short interest of 26.9%. This small cap also has a strong competitor in MWI Veterinary Supply.

While PetMed Express is targeted to pet owners, MWI deals almost exclusively with veterinarians in the US and UK and offers thousands of products to the trade. Its last earnings release was worthy of a blue ribbon, beating on top and bottom, raising guidance, and raising margins. The P/E is high at 27.92 and the stock has climbed 43.8% in the last 52 weeks. Caveat here is a debt/equity ratio of 14.03.

Where the Pets' (Parents) Go

PetSmart is the one-stop shop for pet parents with 1,232 retail stores offering supplies and services such as grooming and training, boarding at 192 PetsHotels, and medical services at 791 veterinary hospitals. It has a 1.0% yield and a 20.47 P/E. Analysts expect a robust 17.79% five-year growth rate (yoy).

PetSmart is seeing some encroachment by Amazon with its Wag.com offering pet supplies from food to ferret clothes (?!) and by Wal-Mart and privately held Petco. However, at a local shopping center PetSmart is located only two stores over from Wal-Mart and is always doing a very brisk business. It offers personalized services that pet parents are hard pressed to find under one roof. Fool Sean Williams disagrees with a recent Nomura Financial downgrade for this very reason.

Who Won The Puppy Bowl

Zoetis has had a great run as has Tractor Supply and both are good names to keep in mind for market pullbacks. PetMed Express has a big yield but may be the most vulnerable of all. Going forward PetSmart may have the most strength, but all of these are in a sweet spot because of our soft spots for our pets and the world demand for livestock proteins.

With pet ownership growing almost exponentially and daily news stories of the health benefits for humans from companion animals, companies don't need as much of a moat if the entire kingdom is growing stronger. Note too that according to the American Pet Products Association's 2009 figures, it costs approximately $15,000 over 10 years to keep a healthy dog and $10,000 for a cat. These companies are the ones to benefit from agricultural and companionship animals.

leglamp has no position in any stocks mentioned. The Motley Fool recommends PetSmart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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