There's Big Money In Taking Care of Animals

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

Pfizer (NYSE: PFE) just sold a little under 20% of its animal health unit to the public. Zoetis (NYSE: ZTS) is a massive competitor in its space and should interest investors looking to benefit from both the farming and the companion pet angle of the animal health industry. The latter has a few other options worth looking at, but there is no other way to directly touch on drugs for farming. While this gives investors more access to a niche sector, was this a good move for Pfizer?

Zoetis

The company that Pfizer just sold a piece of is the biggest player in the animal health industry. It has operations in over 120 countries and posted revenues of $4.2 billion in 2011. Its end clients include dogs, cats, fish, horses, cattle, poultry, sheep, and swine. It sells vaccines, parasiticides, anti-infectives, medicinal feed additives, and pharmaceutical products. About two thirds of its top line is from its farm business with the remainder from its pet products.

Some of the nice things about this business include the fact that there aren't insurance middle men to hinder pricing, the customer base if fragmented so Zoetis has material pricing power, pets are increasingly being provided costly medical care and medicines, and developing nation diets will increasingly include meat products. It looks like animal healthcare is a really good business to be in right now.

Investors are clearly aware of this fact, since they bid the new stock's price up about 20% on the first day. Which should make investors consider other possible investment options, as well. A few to look at are:

MWI Veterinary Supply (NASDAQ: MWIV)

MWI Veterinary Supply 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 revenue and earnings have been on a steady upward path, including right through the deep 2007 to 2009 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. Note, too, that veterinarians also serve the farming market, as well.

PetMed Express (NASDAQ: PETS)

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 found in local retailers like 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 revenue 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 recently sat around 4.5%, making this the highest yielding option of the group.

VCA Antech (NASDAQ: WOOF)

VCA Antech 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. Revenue has been on a steady upward climb over the last decade, and although they slipped for a couple of years coming out of the recession, they appear to be in an upward trend. This company is kind of reliant on customers willing to go to extremes to keep their pets healthy, which makes it particularly susceptible to economic weakness. 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.

Not Much for the Farm

Those three companies are all largely focused around pets. There really isn't a good way to directly access the farm arena except Zoetis. The company's most notable competitors are all integrated within large pharmaceutical companies. At this point, none of the other drug companies have public plans to spin their animal health units off. Investors looking for a way to get into this industry clearly liked the IPO, but that Pfizer is going down this road alone makes one question if it's the road less traveled for a good reason.

Part of the logic for the move is to help Pfizer focus more of its attention and resources on its core pharmaceutical business. This is the same reason why the company sold its infant nutrition business to Nestle. While this makes sense on one level, particularly in light of the patent expiration issues facing the company, the infant nutrition and Zoetis businesses were solid cash-cow businesses with at least modest growth potential. Zoetis could actually see material growth if emerging market diets continue to include more meat.

So breaking up the company's businesses to focus on just the one may have weakened the company overall. Now, drug results will make or break the company. Sure pharmaceuticals may have a higher growth profile and good margins, but a stool with three legs balances much easier than a stool with only one leg.

Yours,
Reuben Gregg Brewer 


Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool recommends 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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