US Stocks to Benefit From Pandemic Pet Boom

The ongoing surge in pet ownership is expected to continue as more people skip bustling big cities, opting for a quieter life in the suburbs. The trend could create secular growth winds for the following companies in the pet care industry whose fortunes flourish when pet ownership accelerates.

Animal care firm Idexx Laboratories (IDXX) primarily develops, makes, and sells products, equipment, and services for pets and livestock. It also provides diagnostic and information systems for veterinary, food, and water testing applications. It derives about 38% of its revenue from outside the U.S.

Idexx has consistently ramped up its scale and reach in the veterinary diagnostic business to carve a narrow moat. The firm is well-positioned to benefit from the higher pet ownership and spending trends. “Pet ownership continues to grow, with 67% of U.S. households owning pets in 2020 compared with 56% in 1988,” says Morningstar equity report, pointing out that pet owners’ spending on animal products and services has more than tripled since 1994.

The company has carved out a strong position in single-use test kits for in-office use. Idexx’s dominance in this space is underpinned by an impressively wide range of companion animal diagnostic tests delivered in many forms. “These premium-priced, high-margin products offer the convenience of results in less than 10 minutes,” the report says.

The company also boasts a leadership position in off-site lab testing and in-hospital analyzers, areas that have historically seen robust growth. “Its focus on developing and broadening its menu of tests makes Idexx more of a one-stop shop for animal hospitals,” says Morningstar equity analyst Debbie S. Wang, who recently boosted the stock’s fair value from US$270 to US$301, prompted by companion animal segment growth in 2021.

The firm is now aiming to replicate its U.S. success in other developed markets. Wang anticipates “many years of growth ahead [spurred by] rising incomes in emerging markets.”

Tractor Supply (TSCO) is the largest consumer farm specialty retailer in the U.S. with expected US$12 billion in sales in 2021. The firm caters to recreational farmers and ranchers through 1,943 stores in 49 states and 184 Petsense stores. In 2020, revenue consisted primarily of livestock and pet (47%), hardware, tools, and truck (21%), and seasonal gift and toy (21%).

“Tractor Supply's generally resilient consumer base allows for more consistent revenue growth through both expanded footprint and category exposure,” says a Morningstar equity report.

The company’s store bases grew 29% to about 1,920 locations (around 2,100 including Petsense), over the prior five-year-period ending in 2020. The expansion helped drive annual sales and EPS growth rates over the past three years of 14% and 27%, respectively. 

By 2030, Tractor Supply’s store count is forecast to reach 2,800 stores, with Petsense accounting for about 280 locations.

“The niche product offerings place Tractor Supply in a unique position, insulated from peers that focus on one segment of the market,” says Morningstar equity analyst Jaime Katz, noting that the firm’s breadth across product categories provides a one-stop solution for those looking to fill multiple needs across outdoor categories.

Tractor Supply has reached critical mass in its consumer segment, paving the way for consistent profit and margin expansion, asserts Katz, who recently upped the stock’s fair value from US$120 to US$130, prompted by the first-quarter revenue growth of 43% and same-store sales of 39%, “as the firm continues to benefit from its focus on the socially distant outdoor lifestyle as well as the boom in pet adoptions.”

Zoetis (ZTS) sells anti-infectives, vaccines, parasiticides, diagnostics, and other health products for animals. Production animals (cattle, pigs, and poultry) make up nearly half of total revenue, while companion animal (dogs, horses, cats) products earn the other half. The firm’s U.S. business is heavily skewed toward companion animals, while its international business leans more towards production animals.

With the largest market share in the industry, Zoetis is the undisputed leader in the global animal health industry. “Zoetis has set itself apart based on its impressive innovation that shows up across its product portfolio, including a number of drugs for specific pet ailments such as separation anxiety,” says a Morningstar equity report.

The firm is also pushing to expand its presence into every segment of animal-related health market, including aquaculture and pet diagnostics. “The animal health industry had long been largely ignored because these businesses were buried within larger human health companies, but no longer,” says Wang.

Unlike the human health industry, animal health industry isn’t constrained by pressure to use generic products and to keep prices low. “Animal health products are purchased by a fragmented group of protein producers, veterinarians, and pet owners, allowing very little bargaining power over the highly concentrated animal health firms,” argues Wang, who recently raised the stock’s fair value from US$125 to US$142, implying the firm “has benefited from a bump in pet adoptions during the pandemic, and from pet owners noticing pet health issues as they spend more time at home.”

Zoetis is projected by Wang to grow slightly faster than the industry and maintain above-average margins due to its scale and its shift toward the faster-growing companion animal segment.

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