Making Money Off of Pets

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

People love their pets, sometimes to a degree that makes non-pet owners a little sick to their stomachs. It isn't hard to understand how some would find it odd to push a lap dog around in a baby carriage. However, this is an important trend in the pet industry (pet spending, not baby carriages). Companies like PetSmart (NASDAQ: PETM), MWI Veterinary Supply (NASDAQ: MWIV), PetMed Express (NASDAQ: PETS), and VCA Antech (NASDAQ: WOOF) are direct ways to get involved in the increasing amount of love we, as a nation, are showing our non-human companions.

Selling to the Consumer
PetSmart is one of the largest pet supply retailers in the country, competing most directly with privately held Petco. It sells everything from food to bedding to complete habitats (for pets like fish and turtles). Pet retailers have increasingly been getting into the services space, too, offering such things as dog training, pet grooming, and veterinary services in these stores that often hold destination status for pet owners. This should give companies like PetSmart the opportunity to get more of the pet spending pie over time. PetSmart's revenues have steadily increased over the past decade, impressively even through the 2007 to 2009 recession. Earnings have been more volatile, but have generally been heading in the right direction. With over 1,200 stores, the company is a giant in a largely fragmented industry. With a small dividend that has been growing nicely in recent years, it might be of interest to dividend growth investors looking to get in on this trend.

Selling to All the Doctor Doolittles
Another option is to invest in a company that sells the “picks and shovels” of the industry, MWI Veterinary Supply. The company deals directly with veterinarians and animal hospitals, supplying them with over 30,000 products from examination tables to medial consumables to animal pharmaceuticals. It has operations in the United States and the United Kingdom, servicing more than 20,000 veterinary practices. The company's revenues and earnings have been on a steady upward path, including right through the deep recession and the subsequent slow recovery. Although the company doesn't pay a dividend, it has direct access to veterinarians, which are, effectively, the gatekeepers of medicine in the pet world. 

Discount Meds
Although veterinarians hold a great deal of sway over their customers, there are always people looking for a better deal. For these customers, buying pet supplies, primarily medications, over the internet is the ideal option for saving money. Many go to PetMed Express's collection of websites and catalogs. It sells many of the same things as PetSmart, but adds the all-important pharmaceuticals category to the mix. With more and more pets diagnosed with livable illnesses, buying drugs is often a monthly event for pet owners, making this an important growth category. Although the company's revenues and earnings were on a nice upward trajectory up until 2010, they have stalled somewhat since then. That said, a recently initiated dividend that has been increased in each of the last three years might entice dividend focused investors. The dividend at this small cap currently sits at nearly 6%, making this the highest yielding option of the group.

The Surgeon Will See You Now
VCA Antech, the last company of the group, owns a collection of animal related medical facilities. At the end of 2011, the company owned over 540 hospitals in 41 states. This segment provides the vast majority of the company's revenues. However, it also owns over 50 laboratory facilities providing services to veterinarians across the country. Revenues have been on a steady upward climb over the last decade, but earnings have slipped over the last two years. Of the four companies highlighted, this one is likely the most reliant on customers willing to go to extremes to keep their pets healthy, which makes it most susceptible to the economic slowdown. Indeed, pet owners are likely to keep buying food and medication for their pets, but hospital visits are a different order of magnitude on the cost spectrum. VCA Antech pays no dividend.

Investors who think pets offer a great investment opportunity should take a deeper look at these four industry participants.

Yours,

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ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend PetSmart and VCA Antech. 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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