3 Stock Picks for Pet Lovers

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Debate rages on as to whether the U.S. consumer is healthy once again. There’s good reason for this, since the U.S. economy is so heavily dependent on consumer spending. But while consumers often cut back on discretionary items when the economy goes south, there’s been little evidence that consumers have cut back on spending on their pets.

In fact, just the opposite—the American Pet Products Association estimated we spent more than $50 billion on our pets in 2011, marking the first time the figure eclipsed the $50 billion mark.

Americans followed up this performance with $53.3 billion in pet spending in 2012, setting a new record. The 6.6% growth in pet spending came in spite of the slow growth in the labor and housing markets. For savvy investors, there seems to be an opportunity to profit from the boom in pet spending.

Three candidates to consider

PetMed Express (NASDAQ: PETS) is a small-cap with a market value of $250 million. The company sells prescription and non-prescription pet medications, health products, and supplies for dogs and cats in the United States.

There’s a compelling investment case to be made for both value and income investors. PetMed Express trades for a modest P/E ratio of 15 times trailing earnings and pays a 4.6% dividend yield. These are fairly attractive metrics, considering the broader market, as measured by the S&P 500 Index, trades for a P/E multiple in the high teens and yields just 2% at recent prices.

PetMed Express has been aggressive with its shareholder return policies. The company raised its dividend 20% in 2012, and did so on the back of mixed full-year 2012 results.

The company reported net income per diluted share rose 7.5% last year, despite an 8% drop in sales. Investors would be wise to monitor the company’s performance going forward to make sure sales get back on the right track.

PetSmart (NASDAQ: PETM) is a $7 billion specialty retailer of pet products in the United States, Canada, and Puerto Rico. PetSmart was no dog of a stock in 2012, rising almost 40% last year.

As a result, the company’s valuation got a little ahead of itself, and the stock has exhibited volatility in recent months on pervasive fears of e-commerce competition.

Any ramifications from new competition haven’t been felt in the company’s underlying results. PetSmart reported 15% growth in earnings per share in the first quarter, as well as 3.5% growth in same-store sales.

Last but not least, an interesting play in pet health is Zoetis (NYSE: ZTS), which only began trading as an independent entity in February after being spun off from Pfizer. Previously, Zoetis was the pharma giant's animal health subsidiary.

Zoetis raised $2.2 billion in its IPO, making it the largest initial offering for an American company since Facebook last May. The stock did well in its first day of trading as a public company, rising 20%.

Peeking into the company’s 10-K, we can see that Zoetis had sales growth of 2.6% last year, and grew its earnings per share by 78%, due largely to reduced expenses.

Zoetis has also declared a dividend now that it trades publicly. The stock yields just under 1% at recent prices.

Pets and profits: man’s best friends

There’s a continuing debate about whether U.S. consumers have finally gotten their financial houses in order. What’s not up for debate is how much we spend on our pets. Our furry friends are absorbing an ever-higher percentage of our budgets. While Americans under financial distress will frequently cut back on luxuries like expensive vacations, there seems to be no limit to how much we’ll spend to keep our pets happy and healthy.

For pet enthusiasts who are also avid investors, you can connect those dots with stocks such as these. Assuming pet spending keeps going higher, these stocks stand to benefit handsomely.

Robert Ciura 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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